Blue Sky Drive. Photo courtesy of Newmark

Conversions to R&D space could be the best option for suburban Boston office landlords facing a financial crossroads, real estate executives predicted at an economic forum focusing on the Metro North region.

“There’s a huge opportunity to refashion the stock of buildings going forward for clean tech, manufacturing and R&D,” said Kris Galletta, chief investment officer at Burlington-based developer Nordblom Co., at a Middlesex 3 Coalition event this week.

Leasing of traditional suburban office space has failed to recover in the post-COVID hybrid work era. The vacancy rate in the 97.8 million-square-foot suburban Boston office market hit 18.9 percent at the end of 2023, according to brokerage Newmark, up from 16.3 percent the previous year.

And demand for office-to-lab conversions has evaporated amid the glut of life science availabilities and continuing increases in the local lab sublease inventory.

But an uptick in demand from the fast-growing clean energy sector points toward opportunities to convert office buildings into R&D space, said Mike Ogasapian, vice president at R.W. Holmes Commercial Real Estate. A significant portion of the suburban office inventory consists of 2-story buildings with big floor plates, loading docks and robust utility infrastructure suitable for repurposing.

“There’s a lot of product out there in existing buildings that are just obsolete and not functioning that have the opportunity to become more of a makerspace: manufacturing, lab, R&D, [quality assurance] testing,” Ogasapian said. “Those are the users we see now taking some of these obsolete class B buildings.”

Nordblom Co. has successfully attracted life science researchers, biomanufacturing and clean energy tenants to its former Network Drive office park in Burlington, rebranded as Blue Sky Center in 2022. Galletta said repositioning of older office buildings for manufacturing and research responds to the continuing growth in clean tech and related industries seeking to reduce dependence on fossil fuels.

“There’s an opportunity to take some of these class B and C office buildings and take them in the flex direction to meet the demand,” he said.

The one-two punch of higher interest rates and lower occupancy will make it difficult for many office landlords to obtain financing when their current mortgages expire, Enterprise Bank Senior Vice President Sean Moriarty said.

“The mix of your tenants really matters. We’d rather see a mix of everything: legal, architecture, a wide range of folks,” he said.