The Building Where the Ventilation Costs More Than the Walls
Laboratory buildings require air handling, power, structural loading, and safety systems far beyond an office. That capital cost, and the difficulty of converting the space to anything else, defines the asset class.
What Makes a Laboratory Expensive
An office building moves air, supports people and furniture, and provides power for computers. A laboratory does considerably more.
The dominant requirement is air handling. Laboratories using chemicals require fume hoods, and air passing through a hood is exhausted rather than recirculated. That means the building must condition and exhaust a very large volume of outside air continuously, requiring mechanical plant several times the capacity of an equivalent office.
Other requirements compound it. Floor to floor heights must be greater to accommodate ducting. Structural loading must support heavy equipment. Vibration must be controlled for sensitive instruments. Power density and backup power exceed office standards. Specialist gas distribution, waste handling, and containment systems are required depending on the work.
| System | Office | Laboratory |
|---|---|---|
| Air changes per hour | Modest, recirculated | High, once through |
| Floor to floor height | Standard | Greater, for services |
| Structural floor loading | Standard | Substantially higher |
| Backup power | Life safety only | Freezers, equipment, containment |
Construction cost per unit area accordingly runs at a substantial premium to office, and the mechanical and electrical systems represent a far larger share of the total.
Most of the cost is in systems the tenant cannot see and cannot do without. That is why converting an office into a laboratory is frequently more expensive than building new, and why the conversion wave that followed office vacancy delivered far less space than announced.
Why Rents Are High and Why That Is Not the Whole Story
Laboratory rents exceed office rents in the same submarkets, sometimes substantially, and the reason is straightforwardly the cost of delivering the space.
Tenant improvement allowances are also far larger, because fitting out a laboratory for a specific research programme costs a great deal. A landlord contributing a large allowance is effectively financing the tenant fit out and recovering it through rent, which means the headline rent overstates the return without adjusting for the capital contributed.
Net effective rent, after amortising the allowance and free rent, is the number that matters, and the gap between it and headline rent is wider in laboratory than in office space.
The Tenant Credit Problem
The occupier base creates an unusual credit profile.
Large pharmaceutical companies are strong covenants. A substantial share of the tenant base is not: emerging biotechnology companies with no revenue, funded by venture capital or public markets, whose ability to pay rent depends on raising the next round or on a clinical trial result.
Landlords underwrite this by requiring security deposits or letters of credit sized to a meaningful number of months rent, and by monitoring tenant cash runway.
The sector consequently correlates with biotechnology funding conditions rather than with general economic activity. When capital markets close to early stage life sciences companies, demand for laboratory space falls regardless of what the wider economy is doing, and existing tenants may fail.
The Cycle That Followed
The asset class attracted substantial capital following strong biotechnology funding and a widespread view that laboratory space was structurally undersupplied.
Development responded, concentrated in a small number of clusters, and delivery arrived over the following several years. Meanwhile biotechnology funding contracted sharply, tenant demand weakened, and several companies consolidated or failed.
The result in the major clusters was a substantial increase in vacancy and available sublease space, with new deliveries arriving into a market that no longer needed them.
That sequence is an ordinary property cycle. What makes it more severe in this asset class is the specificity: an empty laboratory cannot readily become anything else, so there is no alternative use to absorb the surplus.
The Clustering
Laboratory demand concentrates geographically to an unusual degree, around a small number of locations combining research universities, teaching hospitals, specialist venture capital, and a labour pool of trained scientists.
That concentration is self reinforcing and it means the asset class is a bet on specific submarkets rather than on a national trend. A laboratory building in a location without the surrounding ecosystem has a very small tenant pool regardless of its quality.
The Bottom Line
Laboratory buildings cost far more to construct than offices because of air handling, structural, and power requirements, and they command higher rents for exactly that reason. The specificity that justifies the rent also means the space cannot be repurposed, so an oversupplied market corrects slowly and painfully. The tenant base is substantially made up of companies funded by capital markets rather than by revenue, which ties the asset class to biotechnology financing conditions more closely than to anything happening in the wider property market.