Life Sciences Conversions Could Be The Next Big Thing To Fix Dallas' Office Vacancy Problem
The trend of converting office buildings to apartments has generated a lot of buzz, but a growing need for more lab space in DFW could also present an opportunity to revive defunct real estate.
A record number of office-to-lab conversions is underway in the U.S., comprising about a third of the life sciences construction pipeline and 12.5M SF, according to CBRE.
The work is mostly concentrated in major hubs like Boston and San Francisco, but in Dallas-Fort Worth, several companies are exploring the possibility of conversions as a means of addressing rising office vacancies while also making space to grow the region’s burgeoning life sciences ecosystem.
A couple of years ago, Lyda Hill Philanthropies and J. Small Investments unveiled Pegasus Park, a 25-acre life sciences development on the site of the former Exxon Mobil campus. Its anchor tenant, BioLabs, is a 37K SF coworking laboratory that includes wet labs and office space.
BioLabs was an immediate success, quickly leasing up with tenants using the lab as incubator space. Pegasus Park is now gearing up for a 135K SF expansion, and the Dallas Morning News reported it is also being pitched as a candidate for the federal government’s new biomedical research agency.
“More places in the U.S. are looking at conversions to get more lab space on the shelf,” said Danielson, who partnered on the BioLabs project. “It’s so cost-prohibitive now for new construction in some of these urban environments. And especially in these ecosystems, where life science companies like to cluster, you're really almost forced to get creative with adaptive reuse of these buildings.”
Dallas is considered an emerging market for life sciences, according to JLL, mainly due to its proximity to dozens of colleges and universities that pump out thousands of potential employees.
More than 220 life sciences companies have relocated or expanded in DFW since 2010, and the Dallas Regional Chamber estimates there are about 90,000 existing life sciences and biotech jobs currently in the Metroplex, according to The Real Deal.
What Dallas lacks is readily available lab space for companies to go, which is where conversions could help position the sector for growth. Taking advantage of existing buildings also helps the Metroplex compete on a cost basis, said Ethan Garner, managing director at JLL and leader of the firm’s regional healthcare initiatives.
“The reason why we’re able to offer lower-than-market rates on conversions is because we are taking advantage of an existing facility,” Garner said. “We think the demand in Dallas is here, and it will continue to grow, but it hasn’t gotten to the point where kicking off a brand-new building of scale has been justified.”
Electronic Data Systems’ former headquarters in Plano could be DFW’s second life sciences hub. A proposed project from Dallas-based investment firm NexPoint would convert 1.6M SF of offices into lab and manufacturing space. At full build-out, the more than $3B project, dubbed the TxS District, would cover 135 acres.
Danielson is partnering with NexPoint on TxS, and he said the campus is a prime candidate for conversion. The right buildings have higher ceilings, wide bay spaces and passenger elevators that are separate from freight elevators — all of which was fortuitously included in the EDS space.
“It’s like a laboratory planner’s dream,” he said. “It’s almost like they must have been thinking about doing labs in this building, but they weren’t.”
Defunct office campuses also lend themselves well to conversions because they allow various companies to cluster together and share ideas. They also tend to include back-up power in the form of generators, which Danielson said is critical to safeguarding the research underway on-site.
“A lot of these companies include researchers who are now taking their life’s work out to market and commercializing their science,” Danielson said. “They’re essentially trusting their science to a landlord to safekeep that.”
Building out lab space can be up to three times more expensive than what it costs for office, which is why an investigation of the space prior to signing a lease is critical, said Teresa Rodriguez, managing director of interiors at LPA, a design firm specializing in adaptive reuse and life sciences.
LPA is working on a handful of projects 25K SF or larger in Dallas that are in the feasibility phase as well as a few that are moving forward with construction, she added.
“There’s just a monster checklist of things, and it’s really specific to the type of lab,” Rodriguez said.
One way to accelerate life sciences activity in Dallas is by educating brokers on how to market defunct space as potential labs, Rodriguez said. Agents who have traditionally focused on office are increasingly interested in adopting life sciences as a specialty, she said, but the field is highly technical and requires a lot of training.
Demand for more life sciences space led LPA to launch a series of educational courses aimed at explaining the ins and outs of conversions — the differences between various labs, what they require and potential costs.
“There’s a bit of a learning curve there,” Rodriguez said. “The costs are much higher, and if the infrastructure is not there, that has to be factored in as well.”
Just because a building is well-suited for a conversion doesn’t mean the project will go off without a hitch, said Josh Parker, chairman and CEO of Ancora L&G, a Washington, D.C.-based developer focused on biotech and life sciences.
Other factors, such as zoning requirements, ease of permitting, location and whether there is an opportunity to build critical mass around the site, should also be considered.
“Markets trying to emerge as a life science hub should think about clustering and density,” Parker said. “As much as space is important, and the cost of space is important, what really matters is the talent being able to be in close proximity and collaborate.”
If a city is keen on growing its life sciences ecosystem and offloading underutilized office space, economic development officials need to understand the complexity of the industry and try to remove obstacles that would discourage development, Parker said.
“We don’t choose to invest in places because they have a really user-friendly building department,” he said. “But if we’re evaluating two different investments, and one is going to be bogged down in a permitting review process for a long time, we’re likely going to go somewhere else.”
One of the main ways Dallas vies for life sciences business is through real estate costs, which Rodriguez said are significantly lower than coastal markets. This is a good short-term strategy, Parker said, but the long-term play should be to cultivate enough interest that rent growth, purpose-built development and adequate infrastructure take over as the primary draw.
“It’s important to compete on price, but there’s a lot of places in the country that compete on price,” he said. “Eventually, what you have to do is compete on quality and depth of talent and ecosystem.”
JLL predicts the life sciences market in Dallas will reach maturity within the next 10-15 years at between 5M-10M SF of space, which is only a fraction of Dallas’ existing office inventory.
As such, lab conversions probably aren’t the panacea to the issue of increased office vacancies, Garner said. They may be part of the solution, but only once more investors see Dallas as a worthwhile place to take the plunge.
“It’s still challenging to convert an office building to R&D space. There’s a high level of sophistication and a high level of complication that occurs when you try to do it,” Garner said. “It’s really got to pencil out to make sense, and I don’t think Dallas is at the stage yet where the demand has really justified the risk.”