February 22nd, 2022
Each year, our industry experts evaluate and review the Raleigh, Durham, and greater Triangle commercial real estate market’s annual performance. We share activity and trends from the market data we analyzed and experienced in 2021 to activities we anticipate in 2022.
What are the key market drivers? How have the different real estate sectors performed?
In this segment, we interviewed Robin Roseberry Anders, SIOR, Executive Vice President to share her thoughts on life science trends.
To learn more about other property types click on office, land, investment sales, retail, healthcare, flex, and warehouse.
Life Science made up 1.8 million SF of leasing in 2021 and was a primary driver for leasing absorption, especially in the Research Triangle Park and I-40 submarkets. 2021 was marked by the continued decimation of single-story second-generation flex inventory, much to the chagrin of tenants seeking these historically inexpensive options, due to investors continuing to acquire and convert to life science uses. And not just flex has been affected … one of the 2021 deals of the year was a 245,000 SF functionally obsolete outlet mall conversion to a California-based genetic testing company’s research space. 2021 net flex absorption, which includes both life science and industrial, actually exceeded pre-pandemic levels.
There were multiple winners in the life science space category. The conversion of single-story flex provided an immediate and cost-effective injection of life science ready spaces to the market, driving organic growth and attracting new research companies. The significant jump in rents from traditional flex rates of $14.50 per SF to $30-32 per SF lab rates drove swift interest from life science savvy investors who saw the opportunity to convert not just flex but also more unusual product types, such as an outlet mall and a Sam’s Club. In fact, the latter conversions were initially visualized as “creative office,” but with the pandemic slowing office growth and the demand for life science space increasing, life science properties have stepped in to fill market vacancy gaps.
The success of single-story conversions boosted interest in both suburban and urban new, multi-story lab developments with increased amenity levels, and thus another jump in rent. That said, Triangle-wide life science average rents currently fall well short of the averages amongst its national competitors. Average rents in the +/- $30 triple net range offer plenty of rent growth opportunity when competing city national averages range from the $40s up to $90s per SF.
While the sheer number of conversions from other property types to R&D space has been significant over the past year, it has yet to convert to oversupply . Life science rates continue to increase and the current available inventory of 200,000 SF continues to drive market activity, with the greatest focus in the Research Triangle Park/I-40 submarkets. 2021 saw lab spaces leasing that never hit the market, a side effect of being in the country’s top three most active life science markets. Urban life science spaces are also growing, with increases in rates 25-30% above suburban single-story.
The Triangle area continues to receive multitudes of national accolades and is recognized for the high rank of our Tier 1 research universities. We have the talent and skilled labor that many firms seek, a low cost of living compared to other major life science clusters, and the lifestyle amenities that allow companies to recruit in a highly competitive market. People move to Raleigh and Durham for these attributes, 64+ per day on average in Wake County alone. With the strong Triangle area fundamentals supporting a growing lab/R&D population, and so long as life science funding continues to flow, we expect life science activity to continue its upward trajectory.
The tightness of available single-story options, the success of new multi-story life science by Alexandria Real Estate, and companies’ continued interest in highly amenitized and experiential space will continue to drive new ground-up developments. With the largest majority of R&D space in the RTP/I-40 submarkets under lease, and the fact that life science companies want to locate amongst their peers, we see growing barriers to entry driving new multi-story opportunities. Life science companies such as King Street Partners and Longfellow have each put big stakes in the ground with significant proposed life science campuses in Morrisville and RTP. Likewise, those seeking an urban solution will find multiple new options in Downtown Durham to further buoy the decisions made by Wexford and Longfellow since 2015 to develop lab in this submarket.
The notable demand and high rents for life science have attracted significant interest from both seasoned life science developers as well as traditional owners. However, the infrastructure investment for base building power, water, HVAC, etc. is significant and tenant allowances exceed $100-150 per SF on average. Tenant credit combined with vetting the successful science by developers and investors further complicates efforts at risk aversion. Assisting non-savvy clients in understanding the needs of these highly specialized occupiers has helped some from taking unnecessary risk.
Success in life science has been driven thus far by a “convert it and they will come” mentality. It is difficult for users to imagine what a building can become, and many are unable to risk “what ifs” in the case certain infrastructure (such as power and HVAC and loading docks etc.) are not in place, or clearly shown to be feasible. Decision making is mainly practical. Life science users want landlords who can confidently deliver, want to be among their brethren, want effective buildings that meet their needs, and they want to attract and retain the best and brightest talent.
I have always enjoyed being on the front end of a new idea, and life science as a significant cog in the Triangle market is a relatively new concept. As a bio major and chem minor in college, I enjoy putting my education to work for my clients. On my creative side, “before and after” projects are gratifying, especially when the conversion is from a functionally obsolete product type to a modern, state-of-the-art laboratory. Companies such as Alexandria Real Estate have been invested in RTP lab space here for decades, and Wexford stepped in with an urban lab conversion and introduced its “knowledge communities” just over seven years ago. Since then, the market has increased in heat as powerhouses such as Longfellow, Starwood, TPG, King Street Partners and others have jumped into the fray. We are no longer a sleepy destination for life science!
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