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Converting office buildings to life sciences is expensive and difficult. But investors in the Bay Area are warming up to these deals anyway as the battle to meet tenant demand reaches fever pitch.
Ground-up development in 12 of the top life sciences metros, which include San Francisco and San Diego, increased by 42% last year, and lab and R&D conversions increased by 49%, according to an April report from CBRE. Among eight major cities, including Boston, San Diego and New York City, CBRE found San Francisco came in second in terms of percentage gain for in-progress conversions compared to 2021, at 266%. The raw number and size of deals are still relatively low in the city: 640K SF in conversions underway in Q1 2022, last in the list of eight.
Jeff Brink, vice president and CEO of DCI Engineers, attributes the spike in activity primarily to a desire to reach the market faster to capture the wealth of lease demand. He said the largest risk in developing in the Bay Area is often the entitlement process, and converting from office to life sciences eliminates this.
The cost and logistical problems inherent in adapting buildings make it not an ideal solution, said Valentin Doering, director, project engineering and real estate at Astellas Gene Therapies, who spoke alongside Brink at a Bisnow event Thursday.
But Brink said that the desire to get a product on the market before competitors makes the added renovation costs and tradeoffs that come with repurposing an existing structure less of an overall concern.
“They are kind of hedging their bets that if they can get to market first, they are going to get a premium on the extra cost,” he said.
Demand has been strong for lab space over the past year, which looks poised to continue for the time being. Lab leasing rates in the San Francisco Bay Area increased by 12% in the last 12 months, CBRE said, matching the average for the 12 largest life sciences hubs across the country. There may be room to run there too; in Seattle, the average asking lease rates went up as high as nearly 60%.
Though conversions are a potential salve to some of the office vacancies plaguing the Bay Area, it ultimately isn’t a catch-all solution, as much of the retrofitting options simply aren’t feasible, particularly in San Francisco’s downtown high-rise buildings, often because the structure simply can’t handle it.
“The amount of extra load on the foundation system is massive and becomes almost impossible to renovate or modify the foundation system on a high-rise,” Brink said.
Instead, low-rise buildings, primarily in areas like South San Francisco, will continue to be popular targets for such conversions. DivcoWest purchased a 138.4K SF office property in the area at the beginning of this year and secured $124M in financing in order to redevelop an office building into a suitable life sciences space.
Doering said retail and warehouse spaces are often more suited to such conversions, given the typically available space and design.
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