The Twin Cities commercial real estate market continues to heal after being wounded by the worst recession since the 1930s. With the recent downgrade of U.S. credit and subsequent market freefall, the industry’s stability and future growth remains fragile. However, before the debt ceiling debacle and U.S. credit downgrade, the Twin Cities market showed signs of life in the first half of 2011—with positive absorption and slight drops in vacancy.
A steady player in the commercial market: medical office real estate.
While not completely immune to the slowed market, “stable” best describes the medical market’s vital signs. This stability can be attributed to medical providers anticipating the addition of previously uninsured as a result of healthcare reform, along with the increased medical needs of the aging baby boomer population. NorthMarq’s market research report, The Compass, reported 119,199 sq. ft. of positive absorption in medical office properties in the first half of 2011—mostly attributable to the completion of Two Twelve Medical Center in Chaska. Vacancy across the medical market increased from 11.1% at the close of 2010 to 11.6% in the first half of 2011.
What does this mean in today’s medical real estate market? I turned to my senior colleague and Healthcare Advisory Group leader, Stephen H. Brown, for his take on the market results. Brown’s prediction: purposeful, measured growth.
“This is a dynamic submarket with multiple drivers impacting how a clinic evaluates its real estate needs,” explained Brown. “Hospital systems continue to deploy capital conservatively. The impact of healthcare reform on hospital and physician space requirements remains unclear.”
Brown’s insight parallels what we’ve been observing in the healthcare sector. Providers are focusing on strategic, highly visible projects to increase competitiveness while leveraging market lows. Along the same vein, we predict more mergers and acquisitions, along with continued, strategic expansion by larger systems and independent practices looking to expand their market presence.
With a slow-to-recover economy and uncertainty surrounding the impact of the recent US credit downgrade, future market activity for medical real estate remains measured. Expect flat rates and continued concessions to push deals along for the remainder of 2011. New development, which only included Two Twelve Medical Center in early 2011, continues to be slow, with only a handful of projects slated for the remainder of the year.
A slow, measured market is good news for healthcare providers looking to either reduce non-patient care costs through real estate or for those looking to maximize their market presence. But, the future of the market won’t always be turtle-paced. Strong demographic trends and projected growth in the healthcare sector will continue to drive demand for future medical office space.
Chantily Malibago is a real estate advisor in NorthMarq’s Healthcare Advisory Group. As a strategic partner for clients, she helps align real estate solutions with hospital or clinic needs to obtain greater operational efficiency, cost reduction, increased flexibility and enhanced patient care.