Healthcare Reform Spurs Repositioning, Continued Medical Office Development as Systems and Practices Prepare for Influx of New Patients

  • Vacancy rate remained relatively flat at 9.6%
  • Multiple projects under construction that should come on line in 2014
  • Continuing to attract interest of investors

The Twin Cities multi-tenant medical office market, totaling more than 6 million square feet (msf) remains stable. The overall vacancy rate fell in second-half 2013 to 9.6% from 9.8%.

The decrease in overall vacancy was thanks to the approximate 120,000 sf of positive absorption in second-half 2013. Medical office space continued outperforming the Twin Cities general office market, which reported a 17.4% vacancy rate. The average rental rate for multi-tenant medical office space inched up to $18.21 per square foot (psf).

Many on-campus or healthcare system-sponsored facilities are essentially full, with eight hospital campuses once again reporting zero vacancies in their multi-tenant space. Collectively, on-campus space reported a 7.4% vacancy rate and 16,586 sf of positive absorption in the past six months.

Off-campus space reported an 11.5% vacancy rate, relatively flat due to the increased size of the universe with new buildings being delivered to the off-campus market. In the second half of the year, off-campus space recorded 103,490 sf of positive absorption.  

Healthcare Reform Has Arrived
The biggest news in the medical office space and across the U.S. has been the arrival of healthcare reform. The Affordable Care Act (ACA) is expected to add 25 million people to the roster of medically insured by 2016. It has clearly changed access, costs and the rules for the entire healthcare industry.

In anticipation of these changes, major healthcare providers continued to reposition facilities throughout 2013 to strengthen their standing within the Twin Cities market. As a wave of people sign up for health insurance for the first time, the healthcare systems and large independent practices are trying to capture any source of revenue possible from this expanding pool. As more patients have access to healthcare and more of a choice about where they receive care, they are expected to seek care at better facilities. Essentially every system is planning to improve their facilities in one capacity or another to entice the newly insured to utilize services beyond the emergency room.

Healthcare providers are also expecting a bigger strain on primary care providers. Physician recruitment continues to be a challenge, so many of the healthcare systems are relying more heavily on physician extenders like physician assistants and nurse practitioners. Resources will be challenged, and this year will provide a big learning curve to providers.

Busy Development Environment
Developers were very busy in the medical office space market in 2013. Currently, there is approximately 553,883 sf of space under construction and another 279,800 sf planned.

Three projects make up almost half of the space under construction: Mercy Specialty Center (115,000 sf) in Coon Rapids, Plymouth City Center Medical (50,000 sf) and HealthPartners (52,000 sf) in Plymouth, all set to be complete in 2014.

The healthcare systems are becoming more competitive. They are trying to place their clinics and services as close to the community as possible so they don’t risk losing patients to other institutions. Improving economic conditions, more readily available financing, and the Affordable Care Act are all contributing to an overall boost in development.

Outlook
As healthcare reform takes full effect in 2014, the major healthcare providers in the Twin Cities will continue to position themselves for success. For some, this will mean marketing themselves differently. For others, it will mean quickly expanding to outpace the competition. All will be able take advantage of low interest rates. Further, the friendly debt environment should allow more bonding and financing for new development projects.

More mergers and/or alliances are expected to take place at both national and local levels, which is expected to have a definitive impact on real estate inventory. The smaller independent practices will be most affected as they try to remain economically viable.

Investors continue to show strong interest in medical office space. This was highlighted by the acquisition of the West Health medical campus in Plymouth by Chicago-based Harrison Street Real Estate Capital in 2013. Some sale activity is anticipated in 2014.

Medical office space should continue to perform well in first-half 2014 as demand remains strong. As a slew of new projects come on line in 2014, we anticipate positive absorption and upward pressure on rental rates.

To read more, visit the January 2014 edition of Cushman & Wakefield/NorthMarq’s Compass report, now available online.  Visit the web site: www.northmarqcompass.com

About Cushman & Wakefield/NorthMarq

​Cushman & Wakefield/NorthMarq is a joint venture formed in September 2011 by NorthMarq Real Estate Services and the Minnesota operations of global real estate services firm Cushman & Wakefield. By combining the talent of both organizations at the regional level with the global platform of Cushman & Wakefield, we offer clients the best combination of regional strength and global capabilities. The result: the leading commercial real estate firm by all measures in the Upper Midwest.
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