Adaptive Reuse v. New Construction in the Life Sciences Sector

Allen Matkins
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Allen Matkins

Allen Matkins partner Martin Togni recently moderated a discussion on adaptive reuse and strategic design for converting assets into life sciences lab space hosted by Bisnow. Panelists Susie Harborth, Executive Vice President of Business Operations at Breakthrough Properties; Tycho Suter, Head of Investments and Acquisitions on the West Coast for Oxford Properties; and Barry DiRaimondo, CEO of SteelWave, shared their experiences and insights.

WHAT IS CURRENTLY DRIVING THE LIFE SCIENCES MARKET?

Healthcare costs play a significant role in the growth of the life sciences industry. U.S. healthcare costs are 18% of the GDP, and that’s only expected to increase. New drug and gene therapies are the two biggest factors. A huge amount of capital has gone into this space; 70% of all VC capital invested in Massachusetts and California goes to life science.

This growth is reflected in employment rates in the industry. If capital investment graphs are overlaid with employment graphs, they’re practically mirror images, with the employment graphs understandably lagging 24-30 months behind. There is tremendous growth in employment in the space, given all the capital invested over the past four years or so.

Finally, due to advances in science and the convergence of technology, bringing drugs to market is much faster than it was just a few years ago, and the success rate is higher. As a result, investment capital is much more available because the risk profile is quite different.

WHAT ARE THE ADVANTAGES OF CONVERSIONS OVER NEW CONSTRUCTION?

The main factor is speed-to-market. While a new development can take up to two years to be entitled and another two or more to build, a conversion can often be completed in 6-12 months. Newer companies are more likely to look for conversions, while companies still prefer purpose-built spaces.

WHAT ARE THE DRAWBACKS OF CONVERSIONS VS. NEW CONSTRUCTION?

Among the biggest problems with conversions are clear heights, floor load, and power requirements. An existing building can’t always be adapted to suit the specialized requirements of life science companies.

WHAT ROLE DO CONVERSIONS PLAY IN THE CURRENT MARKET?

There will continue to be new developments, but conversions are and will continue to be a “release valve” for many companies to get up and running. Not every company, especially newer ones, demands the building specs be perfect, and speed-to-market often outweighs the desire and cost of a perfect space. It’s usually quicker and less expensive to move into a conversion.

However, it must be kept in mind that any life science space isn’t just a place to work, but rather a talent acquisition tool to recruit the best people. Real estate that isn’t located near transit and amenities isn’t nearly as attractive as that which is.

WHAT ABOUT AMENITIES?

Amenities could include things that are incorporated into the space itself, such as a fitness center and places for workers to socialize, relax, and be entertained. But amenities can also be the surrounding ecosystem of support for life science companies. Support services, chemical research, lawyers, accountants, clinical research, restaurants, and other services are important amenities, although not part of the company’s actual space. As such, proximity to support services is critically important.

That having been said, on-site amenities such as a fitness center, café, and outdoor space are now considered basic requirements for attracting top talent. Some companies are also incorporating meditation and mindfulness rooms and even sleep pods for people who come into town for a quick meeting and then have to leave.

RATIO OF LAB-TO-OFFICE SPACE

The ratio of lab-to-office space in life sciences has changed significantly over the past three to four decades. What used to be an 80%-20% ratio (with more lab than office) is now closer to 50-50. For one thing, much of the lab equipment used today is much smaller than it was years ago. Also, there is a much broader mix of people in life sciences; it’s not made up completely of people who wear lab coats. Life science companies are employing more tech workers and fewer people to work in wet labs. In addition, more established companies often do more clinical research and marketing, which requires additional office space.

WHAT IS THE FUTURE OF LIFE SCIENCES?

The COVID pandemic has shown that science still has a lot to learn about disease and the human body. Also, health care costs continue to rise because of longer life expectancy. All of this translates to one thing: the industry will continue to grow for the foreseeable future.

However, caution is needed on the real estate side. From an employment standpoint, life science is still a small industry; while tech employs about 12 million people, life science employs much less. Although the industry is growing, research institutes and universities can only turn out so much talent each year, so the slope has to flatten eventually. It may continue to grow quickly over the next few years, but eventually, it will slow down. If real estate gets too eager and converts or builds too many spaces, it could get to the point where supply outstrips demand. For now at least and because investment capital is readily available, the life science sector is healthy, growing quickly, and shows no signs of slowing down.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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