How One Company Became a Leader in the Life Science Conversion Process

Demand for lab space in Canada has been on the rise for many years, and supply is struggling to keep up.

According to a report from CBRE, the vacancy rate among the 12.3 million square feet of lab space in the Greater Toronto Area was 0.2% in the first half of 2022. The same report indicated that demand was 141 times higher than supply.

The trend is similar in the Greater Montreal region, where demand is in the millions of square feet. With over 650 life science companies working in the region, Montreal is the second largest life sciences hub in Canada and the sixth largest in North America, according to CBRE.

To help meet this exceptional demand, HarveyCorp, one of the largest lab space owners in Quebec, has developed expertise in the conversion of industrial and office buildings into life sciences facilities.

Last fall, the company announced $140 million worth of projects in the Greater Montreal region, which encompass 380,000 square feet of new lab space. These projects are in addition to the $100 million worth of lab developments the company has undertaken in the past four years.

In an interview with LoopNet, HarveyCorp founder Hugues Harvey discussed the company’s trajectory in the field of life sciences, as well as upcoming trends in the sector.

How did HarveyCorp come to specialize in the construction and conversion of existing properties into lab space for life sciences?

It all goes back to about 2014 and 2015. I had a friend who worked in the life sciences sector who was looking for space, and he told me that availability of furnished lab space was a problem. At that time, we started studying the possibility of converting light industrial buildings into laboratories.

We already had the technical resources to do the job, but that first project gave us more concrete experience. After that, my friend’s project took off and we started getting more requests from other clients.

The first project is tough, the second one is tough, but the third one starts getting easier. And at a certain point, you end up developing a level of knowledge that makes it easier and easier.

As an owner, how involved are you in the conversion process itself?

In terms of our organization, we’re a pretty well-integrated landlord. That means we won’t necessarily be the general contractor on the building site, for example, but we do our own buying and we oversee the work site ourselves. We’re also very involved at the design and planning stages and in terms of engineering. So, the level of technical knowledge that we have within our team is pretty high.

We don’t give a tenant improvement (TI) allowance to the client and let them figure it out. That means we can do deals with clients who otherwise would have shopped around in conventional office buildings where the landlord says, “Here’s the base building. I’ll give you a slightly higher TI allowance, and you figure it out.”

And since they don’t have that critical mass and volume, the clients who do the work themselves end up doing it at a cost that’s 25% to 50% higher than what we would have done.

What distinguishes a lab conversion project from other types of real estate development?

They’re very complex projects. In some cases, the building only represents 20% to 30% of the total project cost. So, the building itself — the shell, the walls, the floors and all that — isn’t the principal element. The issues are the level of complexity, management of delivery times, equipment availability, ventilation, etc.

For example, we have some rooms where you have 40 air exchanges per hour. So, that means installing ventilation units the size of a bus on the roof of a building in an urban environment, with noise constraints, electrical supply, etc.

We’re also taking buildings that were functioning on 1200 amps and ending up with requirements of 6000 to 9000 amps in those same buildings. Those are all challenges that are very different from what industrial or commercial real estate will encounter under normal circumstances.

How has the company evolved since you got started?

We’ve managed to make the spaces that we build and that we rent as standard as possible. We’ve managed to find a formula that allows us to make our spaces relatively interchangeable between clients. We have standard specifications: a standardized emergency power supply with not only electrical, but also compressed air, distilled water, etc.

That allows us to offer spaces faster and to ensure that when a tenant leaves, another one will replace them in more or less the same type of space. That lets us avoid having a single-use space where it’s a lab now, but it’ll be stripped back down to become an office or a warehouse.

What type of building do you look for when taking on a conversion project? What do you look at when selecting a building?

There’s a certain type of building that’s particularly suitable to it, so we know exactly which building will allow us to do an efficient and competitive job. We look at a lot of buildings, and a lot of buildings are offered up to us for conversions; it’s trendy. There are a lot of people these days who want to do life sciences buildings, but not all buildings lend themselves to it.

We have a well-defined set of specifications. When we look at a building, we see if it checks all the boxes. Without giving too much away because it’s kind of our secret recipe, we look at ceiling height, load-bearing capacity of the slab, the number of floors (so as not to lose too much space with HVAC from one floor to another), access to a loading dock, the potential to have an electrical supply that satisfies our needs, etc.

People will often approach us wanting to do a partnership to develop lab space in their building. And often, we look at the building and say, “it’s a good idea, but it won’t work in that building.” Is it possible? Yes. But it won’t be at a competitive price.

We were having this discussion with a Toronto owner a few weeks ago. He said, “my architect and my engineer told me I can do it in this building.” And he was right, he could do it. But the problem is that it’ll be double the price of what we could do in a different building. And then people say, “the client is willing to pay.” Okay, but the problem is when an integrated owner like me comes along and sets up across the street, you won’t be competitive anymore.

Have you noticed any trends in the sector in the past few years? How has the pandemic affected the market?

Actually, the pandemic didn’t have any effect on market trends. It just brought more visibility to the industry but didn’t have any impact on the fundamentals.

What I’ve seen as a trend is a shift toward building more specialized space for environmental technology, engineering labs, that kind of thing, which are spaces that are surprisingly similar to what people use in life sciences.

We’re seeing a shift from maybe 100% life sciences to 70% or 75% life sciences and 25% or 30% cleantech and environmental engineering. So, we’re starting to see more demand in that area, but with the same building and delivery time constraints.

In the past, you developed many of your projects in Lévis (suburb of Quebec City) and Ville Saint-Laurent (borough of Montreal). What drew you to those areas, and where are your new developments?

We chose Ville Saint-Laurent because, historically, there was already a density of life sciences businesses in that area. But our new projects are going to be in more urban areas because we’re seeing a trend that when buildings are only accessible by car and there’s less access to public transit, it creates problems for workforce retention. So, we’re locating our new projects in different environments.

How do you approach your projects from a real estate perspective? Are they speculative construction? Do you plan to sell for added value or hold the assets for the long term?

We start our projects speculatively [without a prelease in place], and then we find tenants during construction. And we retain ownership after acquisition. The idea that we sell to the client is [that we are] a presence during construction and during operations. So, our business model has gravitated more and more toward long-term retention of the assets in order to ensure that presence for our clients.

It’s reassuring to them because they have complex systems in those building on which their revenues and their businesses depend. So, having a landlord who’s there during construction and who will also be there when they have a problem allows us to find solutions more quickly and efficiently.

That integration in terms of service makes a big difference. It’s difficult to have a building like that and hire a subcontractor to do the property management. You have to be more involved.

Are there many owners in Quebec that offer that type of integrated service?

We’re one of two major players in Quebec for this sector. The other one is an American company that bought up properties here. But I think with the new projects that we’re working on, we’ll have the largest offering in the province in terms of square feet available.

You have projects in the pipeline in the Greater Toronto Area. What motivated you to expand to that market?

There’s a strong demand in that area. In the past, Toronto wasn’t as strongly positioned as Montreal, and they’re clearly trying to catch up and to position themselves as a major hub in Canada for that sector. And that comes with certain advantages. There’s more access to capital than in Montreal, even if the industry is more developed in Montreal than in Toronto at the present time. And there’s a willingness from the public and parapublic sectors to attract businesses in life sciences and in related fields.

The challenge for Montreal will be to not rest on its laurels in that sector and to work to stay competitive on a national level.

What do you see for the future of life sciences in Canada? Is the current economic instability having an effect on the sector?

I think we have a few more good years in front of us in this field in terms of industry demand. We’re in a relatively high-growth sector with a niche product and high degree of specialization, so [there are] high barriers to entry. That means that despite a slightly less favorable economic context, we’re able to make the best of the current situation, especially with supply chain delays coming back down to acceptable levels from our equipment suppliers.

This interview has been edited for clarity and brevity.