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San Diego Ranks as Second Busiest Market for Conversions of Office to Life Science Space

5/11/22

This report provided by real estate services firm CBRE

A sharp increase in construction of life sciences labs in the U.S. has included big gains in a premium category: conversions of office buildings to labs. According to a new report from CBRE, San Diego was the second busiest market for office-to-lab conversions in progress with 1.6 msf under construction at the first quarter of 2022.

“San Diego continues to dominate the life sciences industry due to our mature ecosystem consisting of scalable inventory, robust capital investment, and industry leading universities, institutes and health systems,” said CBRE’s Matthew Carlson.

Nationally, office-to-lab conversions in progress in the 12 largest U.S. life sciences markets at the end of 2021 amounted to 9.9 msf, up 49% from the beginning of the year. In comparison, ground-up lab construction increased 42% to nearly 18.8 msf by the end of 2021.

While both measures increased greatly, the jump in conversions underscores the challenges in building enough lab space to meet demand in recent years. Lab vacancy in many top markets sits at 4% or less.

The cost to fit out lab space with necessary plumbing, ventilation, clean rooms and other specialized considerations can be double to triple that of fitting out standard office space. Even so, the increase in conversion activity last year indicates developers and investors are willing to cover those costs to capture the potential rent growth of San Diego lab space in comparison to office.

Specifically, San Diego lab lease rates increased approximately 25% in 2021. Comparatively, lease rates among the 12 largest U.S. life sciences markets increased by an average of 11%. Meanwhile, standard office lease rates increased two percent.

“Converting an office building for life sciences use often can be done more quickly than building labs from the ground up,” said Matt Gardner, CBRE Americas Life Sciences Leader. “In addition, investors see advantages in lab rent growth and the scant vacancy rates for labs in comparison to offices. Still, many lab uses have extensive and significant requirements of facilities, so not every office building is a candidate for conversion.”

Busiest Markets for Office-to-Lab Conversions

Market -- In-Progress Conversions at Q1 2022* -- Percentage gain from Q1 2021

Boston -- 3.3 million -- 264%
San Diego -- 1.6 million -- -9%
Raleigh-Durham -- 1.1 million -- 8%
Los Angeles -- 667,104 -- 339%
Washington, D.C.-Baltimore -- 665,394 -- 78%
New York City -- 660,403 -- -53%
San Francisco Bay Area -- 640,347 -- 266%





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