Finding Lab Space for Startups: Can’t Justify Paying $60-80 NNN for Lab Space?

Can’t Justify Paying $60-80 NNN for Lab Space?
By Elizabeth Holmes

With the surge of new life science companies, sector growth, and the lowest supply of lab space in history, rental rates for lab space have increased dramatically – in some cases, triple a current tenant’s lease rate.

For many life science companies we work with, budgets are strict – whether it’s a startup in their critical discovery/growth phase or the established company that’s self-funded and tackling the many costly areas of running a life science company. So, while Class A lab space may be necessary for some of our clients, others are looking for creative rent relief opportunities.

Lab-Ready Space: The Creative Opportunity

Life Science companies can occupy different types of properties based on their specific needs – both in terms of image and lab infrastructure. Class A, purpose-built lab buildings are ideal for companies needing high-image space for investors and for companies with significant infrastructure needs – such as clean rooms, GMP space, etc. Typically, these companies need at least 50% or more of their space dedicated to lab.

The ideal scenario would be second-generation space for many of our clients due to the limited construction costs, occupancy speed, and typically lower rental rate than Class A shell space. This space is exceptionally rare, and there are very few options available for clients – especially when you narrow the search down due to geography, availability date, and square footage.

Alternatively, for companies with a lighter lab need – such as 1-3 hood vents, a sink, and some benches but the remainder office – Class A lab may not be necessary or cost-effective for their operations. With these lighter lab requirements, Lab-Ready space can be a creative solution.

Lab-Ready spaces are buildings not built specifically for lab users but have the appropriate infrastructure to be converted. This could be a single-story industrial/flex space with significant power and a dedicated loading dock. Or, it could be an office building with appropriate ceiling height and HVAC capacity for light lab use. In either case, these rents are significantly lower than Class A, purpose-built lab buildings.

What To Look For in Lab-Ready Buildings

Many landlords are hoping to grab a piece of the life science market, but not all landlords are knowledgeable about what their building needs to accommodate lab space truly. When looking for lab opportunities, you or your broker are knowledgeable about your infrastructure requirements so you can critically assess the viability of Lab-Ready properties. Or, in many cases, we suggest our clients bring in an expert lab consultant to assist with proving the viability of a property. As a general overview, we critique the following to ensure a building will work for our clients:

• Infrastructure: does the building have the appropriate power, HVAC, clear height, and utilities (ex: sewer instead of septic for water) for our client’s unique space needs?
• Landlord Knowledge: Not all landlords understand lab space, so we focus our clients on properties where owners have previous experience or have partnered with a lab consultant, contractor, or architect who is experienced and knowledgeable.
• Operations: We ensure the building is viable for our client’s day-to-day operations. Such as parking, transportation, loading docks (do you need a separate dock or is a common one acceptable based on contamination or risk guidelines), hallway and door widths, etc.
• Costs and Build-Out Allowances: With lower rental rates than Class A lab buildings, Lab-Ready properties offer lower improvement allowances for buildouts. In some cases, minimal work is needed, and the improvement allowance covers all the work. More often, however, the client will be required to pay for some of the work. When looking at some Lab-Ready properties, make sure you have the financial capacity to pay out of pocket.

Overall, Lab-Ready space has been an effective and creative solution for our light-lab clients. It takes a critical assessment to ensure a Lab-ready space can work effectively for a company’s unique needs. Still, the opportunity for lower rents and shorter lease terms makes these buildings worth consideration.

For questions or a survey of available properties, don’t hesitate to contact a member of our Life Science Team.