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Kendall Square Demand Changing the “Math” with Lab Conversions

The continued lack of available lab space near Kendall Square has given rise to a number of situations where office or industrial properties are being converted into lab space despite the costs and challenges associated with the conversions.

Half of all biotech firms in Massachusetts are located within five miles of Kendall Square, adding continual pressure to rents in the area despite the addition of new supply.

Cambridge’s lab vacancy rate dropped to just 3.2 percent in Q4 2016, with East Cambridge labs posting an even lower 2.3% vacancy rate. Despite the fact that the inventory of lab space has increased by 50 percent since 2005, competition has driven up rents dramatically, with costs per square foot jumping 45 percent in the same period.

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Continual demand and rent growth has made the concept of converting existing properties into lab space more attractive for both landlords and tenants. Two recent conversion projects include industrial space at 75 Moulton Street and office space at 50 Hampshire Street.

“In the right situations, landlords are happy to invest the money for a lab conversion,” said Chris Walsh, an Associate Vice President at Cushman & Wakefield. “They know that the demand and rents for lab-ready space will justify it.”

From a logistical perspective, the biggest factor in evaluating whether a property is suitable for lab space conversion is the floor-to-floor clearances and the building’s MEP infrastructure. Not only do the buildings need to accommodate equipment for lab space, but also additional ductwork to handle greater HVAC requirements.

Compared to traditional office space, lab building systems generally require full outdoor air capability, meaning new systems likely we need to be installed. Some landlords may choose to add on to existing systems, while others may simply replace the systems entirely. Given the increased HVAC requirements operating costs are typically higher as well.

In addition to larger HVAC systems, lab buildings may also require double the electrical capacity of traditional office space due to backup generator requirements needed to support their equipment. Further, natural gas, plumbing, fire protection and waste systems must also need to be evaluated.

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The ability to convert office space to lab is somewhat dependent on the presence of tenants in the building.  Installing expanded ventilation systems to the roof from lower floors can be disrupting to tenants and is often not feasible until tenants vacate their space.

The area’s biotech industry shows no signs of slowing which continues to fuel more demand for office to lab conversions.  With more than 2,000 companies employing more than 81,000 people, Massachusetts was ranked among the top states in the country in terms of research, patents, grants and VC funding by the Biotechnology Innovation Organization.

State officials have also made moves to further foster the industry through the Massachusetts Life Sciences Center.  Its latest program – the Massachusetts Transition and Growth program – will offer grants to smaller biotech companies looking to start operations in the state.

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