Strategic Lab Facility Planning: Expert Insights on Leasing Versus Building a Lab

The decision between leasing lab space or constructing a new facility poses complex challenges and substantial financial stakes. Lab managers and site owners must consider fluctuating needs, the high costs of building, and the delay in facility readiness. These decisions are further complicated by evolving industry demands and the uncertainty of future space requirements. Barry DiRaimondo (BD), CEO of SteelWave real estate management firm, and Peter Llorente (PL), senior managing director at SteelWave, shed light on the subtleties of operational flexibility and strategic planning required to decide the best path forward for your lab and take full advantage of the opportunity to lease a space.

Q: What criteria should lab managers or site owners use to determine if they should lease lab space versus build their own facility?

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BD: It depends, candidly, on what stage the company is in. If they're an early-stage, middle-stage, or even late-stage company, it makes almost no sense for them to own their facilities, for many reasons.

     

One reason is that to build those facilities, it will take a minimum of three years, and probably as much as five, to plan, permit, and construct a new facility. In life sciences, they can’t afford to wait five years.

Another reason is that they don't have any idea what their real estate needs will look like in five years, because they don't know if they will have products that have widespread adoption in the markets or not. As a result of this uncertainty, most companies in these stages are scrambling to preserve cash. 

PL: It’s important to remember that the lab component may only be 50 percent of the actual space; the other 50 percent is probably a more creative and motivating space than your typical sterile lab environment.

Then, you have your common areas where you build your facility, and there, you have to build your amenities. So a lab manager needs to determine where there are any kind of economies of scale to that, versus going into leased facilities that would have all those design features from the common areas and also amenities, such as wellness and fitness, collaborative areas, conferencing, and potentially even a boardroom; where they're only paying a portion of it as a tenant, in a building with others.

BD: It’s also important to fully appreciate the costs involved.

The cost of building a fairly generic life sciences facility is $6-800/sq feet, excluding the land cost or any highly specialized improvements specific to the user’s needs. Land cost varies by location, and specialized improvements vary by need. Minimally, those two elements are an additional $4-500/sq feet and can be significantly higher depending on location and specific needs.

From our perspective, only large, fully mature life sciences companies with multiple products and significant revenue streams can plan far enough ahead for their real estate needs.

In many instances, the first RE that a life sciences company owns is a production facility to produce fully approved products that the marketplace has approved and accepted.

Q: What are the advantages of leasing lab space? Are there any general cost savings tips or common challenges (or hazards) when looking for a lab to lease?

BD: It all depends on what someone's use will be inside the labs.

Not all labs are created equal. It's not like all the same stuff happens in every single lab. Instead, it is specialized as to whatever the user is doing and the specialized equipment they bring into the labs that need to be hooked up.

The cost savings of leasing lab space is in the decreased amount of time it takes to get in and operate, which is much more streamlined than if you were to do it from scratch on your own.

And it helps to preserve cash, because you don't have to make the same level of investment; you don't have these massive capital outlays.

The bottom line is leasing lab space means you don't have to pay for the kinds of stuff that you would have to pay for on your vis-à-vis some of these common area facilities.

PL: I would add that when you start getting into lab components, there are components in that lab that don't make any economic sense to be a standalone system. For instance, backup power capacity, backup power quality air, pressurized air vacuum, water purification systems, etc.—a lot of these things may be needed in a lab, and that lab component, again, may only be 5,000-10,000 sq feet, so it becomes more difficult to purchase standalone systems versus leveraging off a building system that is installed, that can already accommodate 100,000 sq feet of users in that building.

We have many projects where the tenants can share in the backbone of that lab, and it saves them a lot of money, in the magnitude of hundreds of dollars per sq foot that they wouldn't otherwise be paying on top of their lab build-out, which could be another $300/sq foot.

When you lease a space, you should expect that your landlord will be your partner in crime, and that you will have a working relationship with that landlord.

The numbers start getting daunting as opposed to moving into one of our projects and paying rent that's on a lower cost of capital, as Barry mentioned, and with a lot more efficiency in the way we built it and our costs.

Q: How can lab management's end users get the most out of a leased lab space? Are there important things they should know about working in a leased lab?

BD: When you lease a space, you should expect that your landlord will be your partner in crime, and that you will have a working relationship with that landlord. That involves building a relationship early in the process that can inform both the landlord of your needs and you of whatever constraints the landlord may have. Having that kind of completely forthright relationship with your landlord is imperative to an optimal outcome for the user.

PL: Having that ability to work through customization and give-back rights for the landlord and/or tenant in the way of restoration, all those things come into play.

There is a certain amount of customization that can happen as long as there is a good relationship between the landlord and the company, and everybody understands what the motivations are through the lease, and even to the end of the lease.

BD: As the landlord, we are now becoming much more involved in securing the individual operational permits for the users, than maybe we were in the past.

This is partly because we now have a better understanding of the system, and part of that is because the user doesn't understand the permitting process.

Historically, the users went out and battled with the regulatory agencies who oversaw the permitting process. More and more of that is becoming the responsibility of the landlord to help speed up the process.

We know what landmines not to step on—some of it is just based on how you label rooms on a plan, because if you mislabel the room, you may be dead on arrival.

So, our understanding helps to sort through the hot points that regulatory agencies don't want to run afoul of.

Q: How can lab management work with an architect or designer to customize a leased lab space to fit their needs? Are there typical things they can or cannot do to customize a leased space?

BD:

For the most part, a tenant can get whatever they need out of a leased space. They may have to pay for some of it, but they're certainly paying for much less than if they built it themselves.

Your typical lab space, if it's purpose-built, is built to be fairly generic and accommodate a wide range of uses. When you get into conversions and other areas that are less purpose-built and more bolt-on-type systems, you will see some compromises. But with a truly purpose-built building, you should be able to accommodate almost any of the needs of a user or accommodate them well enough so that they can bolt on the hyper-specific components that they need and do so efficiently. 

One issue that may arise is zoning. This is especially true with instances of viral labs, where you may have use and zoning issues that preclude you from leasing space in a certain location, and you may be forced to do some sort of purpose-built initiative on your own in an area that's zoned for that kind of use.

As an example, you are probably not going to have Class 3 viral labs next to residential housing. That'll never happen. So that may force you to build your facility somewhere else in a remote area.

Q: When a lease is close to its end, how can a lab manager determine whether they should continue the lease or look for a new lab facility?

BD:

There are several questions a lab manager must ask:

• How much capital have they invested into their occupied space for specialized needs?
• Does the space work for you?
• Is it currently meeting your needs?
• Do you need more space?
• Do you need less space?
• Do you have additional products, such that you need to modify the lab space to be able to accommodate that kind of stuff?
• How tight is the market?

Responses to these questions from the onset allows the lab manager to formulate a decision based on data.  

If the space meets the users' needs and they don't need to expand, we typically see that they will lean towards staying. If, on the other hand, the space is completely outdated and needs to be radically retrofitted to meet their needs, they will be leaning towards leaving, because it's almost impossible as a lab user to live through a dramatic remodel.

If a landlord, who is supposed to be your partner, isn't meeting the user’s needs, isn't spending the amount of money they need to spend on the capital infrastructure of the building, and isn't doing anything to accommodate some of their special needs, it is likely time to find a new landlord.

The challenge, though, is that every time a tenant moves, there is a significant capital outlay that the tenant must make.

Even though the new landlord is investing the lion's share into the space, they will still be investing dollars into that space, and there are a lot of soft costs that they will be investing into that space. The reality is there's no such thing as a cost-free move.

The other factor to consider, especially when you are dealing with early and mid-stage companies, is that their world has changed radically from the start of their lease to the end of their lease. They are either in a much better situation or they are in a worse situation. Very rarely are they in the same situation. Consequently, the needs of the users dramatically change over time, especially in the life science world.

Q: Is there anything that a leasing company would like lab management leadership to know or questions one would hope they ask when you meet with them about possibly leasing a lab?

PL: While lab management leadership are generally businesspeople, they're also researchers, and we spend a considerable amount of time educating them as to the infrastructure backbone that we have in our buildings. And that is a time-consuming process.

And at SteelWave, we take that process very seriously. We have deliberately built up our infrastructure within our company to roll up our sleeves with these lab managers and to understand and interpret what their actual needs are, and how the facility that we're looking to lease to them can solve their needs and provide everything that they need. But we also know that there are many landlords that don't necessarily have that expertise in-house and will just say, "You're on your own getting through the city; you're on your own in dissecting what we have in our building, and whether this infrastructure can solve your needs."

It’s a pretty rigorous process and it’s one major way that we certainly distinguish ourselves as a company.

BD: Every user learns a lot when they sign a lease and go through a move-in process. And if they've never done it before, you're probably dealing with very inexperienced people who probably have expectations that may not be realistic. But that same principle goes for landlords too. The more experienced your landlord is, the better for the user, and to the extent they're both experienced, that's the best of all worlds.

Q: Are there any takeaways that we'd like to leave with the publication?

BD: The lab industry is not static by any stretch of the imagination. Looking back 20 years ago, the ratio of lab space to office space was very different. The office was probably 20-25% of the space, with the lab being the remainder. As you look at the lab industry of today, the lab component has gotten smaller, and the office component has gotten larger. Much of that is because test tubes are being replaced with computing systems and artificial intelligence (AI).

Another key reason is miniaturization. When I first entered the space, many of the sequencers and instrumentation were the size of a Volkswagen. Today, that stuff just sits on your lab bench. The whole notion of miniaturization and AI-generated computing power is radically changing what's happening inside the lab space.

You are also seeing a dramatic pickup in the soft elements of design. 15-20 years ago, the lab space and the office part of it was like walking into a hospital, and it almost felt like you weren't trying to create a work environment; you were trying to create a patient environment.

Today, that has transitioned into much more of a work environment. You are now seeing design elements in lab space; not so much the purpose-built lab component, but in the office and in the common areas, which are much more reflective of hospitality and residential; it's a much softer environment that's much more appealing for employees.

You are ultimately trying to create an environment where people want to come to work every single day. And that's especially true in life sciences because operations happen at all hours of the night and day, and people must be there.

So, you're trying to create an environment that is a little softer around the edges.

Barry DiRaimondo, SteelWave, LLC cofounder, chief executive officer and chairman

Hosting over four decades of experience in the industry, Barry DiRaimondo oversees strategic investments and operations across all Steelwave LLC commercial real estate (CRE) and company-related matters, including ownership and disposition strategies on enterprise-owned assets and development and acquisition approaches applicable to each SteelWave market.

A member and council chairman of the Urban Land Institute, Barry is an outspoken thought leader in addressing challenges and opportunities for investment in the modern CRE marketplace. He additionally serves as an expert commentator to globally resonant media, including Bloomberg, Fortune, the San Francisco Standard, the Los Angeles Times, and the International Business Times.

Peter Llorente, SteelWave, senior managing director, A&D, Denver, Seattle, Portland, Texas

As senior managing director of Acquisitions and Development in SteelWave’s Denver, Seattle, Portland, and Texas regions, Mr. Peter Llorente oversees the acquisition, financing, asset management, marketing, leasing, and property management for SteelWave. Peter Llorente has over 38 years of real estate experience and has been with SteelWave for 23 years. Since joining SteelWave, Peter has acquired and developed over 80 properties at a cost of $4.2 billion.

Prior to joining SteelWave, he established the Rocky Mountain Office of the Panattoni Development Company. As regional vice president of Panattoni, he developed in excess of 800,000 square feet of office space totaling over $136 million in commercial development.