DALLAS, TX–Construction costs for life sciences real estate have increased by 20% to 25% since before the pandemic and lab-construction activity has waned in the past two years, according to a new report from CBRE.
CBRE’s analysis found that lab-construction costs had risen by at least 20% across the U.S. due to overall inflationary pressures, rising materials costs and longer lead times for certain specialty equipment, such as air handling units and generators.
Lab construction surged in the U.S. during the pandemic as investors, financing and startups flowed into the life sciences sector. But the economic slowdown of recent years and the pandemic’s end have sapped the sector’s momentum. As a result, construction activity, a lagging indicator, has declined by nearly half since peaking at 40 million sq. ft. in last year’s third quarter.
CBRE predicts that in-progress lab construction will decline to pre-pandemic levels by 2026.
“Cooler heads are prevailing,” said Matt Gardner, CBRE Americas Life Sciences Leader. “Lab landlords are returning to the pre-2021 approach to development, reflecting the realization that the temporary peak was an aberration, not a new normal. We continue to see the higher costs of fit out that reflect the highly specialized nature of life sciences space.”
Similarly, conversion of buildings to labs from other uses – mostly offices – has declined. Across the largest 13 U.S. life sciences markets, conversions as a percentage of square feet under construction declined to 20% in this year’s second quarter from the peak of 35% in early 2022. Conversion activity fell off as occupiers found more options with new, unleased space coming online.
CBRE studied construction costs across 25 U.S. cities to determine construction cost ranges for seven types of life sciences facilities. That ranged from life sciences warehouses at $165 to $306 per square foot to vivariums at $1,083 to $2,011. Vivariums are specialty facilities for housing and studying live animals under controlled conditions.
Another cost on the rise: tenant-improvement allowances, which is the capital that building owners provide their tenants to build out the interior of their space. Those allowances have increased by an average of 38% since 2021 in eight leading life sciences markets, ranging from $175 to $200 per sq. ft. in the Washington, D.C.-Baltimore area to $250 to $250 per sq. ft. in the San Francisco Bay Area. Tenant-improvement allowances tend to increase when building owners face more competition to sign tenants.
