Construction Activity Ramps Up in Medical Office Market to Accommodate Expanding Patient Base

With a healthy supply of development activity underway, the Twin Cities multi-tenant medical office market continues to be strong. Totaling more than 6.1 million square feet (msf), the medical office market saw its overall vacancy rate drop to 9.7% in first-half 2014.

The overall medical office market enjoyed 58,176 sf of positive absorption, which was primarily due to the new 115,000-sf ambulatory care center that opened in early 2014 on the Mercy Hospital Campus in Coon Rapids.

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 remained relatively flat at $18.13 per square foot (psf). While the average remained relatively flat, new construction rates were running in the low to mid $20s throughout the Twin Cities market.

Eight out of 16 hospital campuses reported 100% occupancy, while collectively on-campus space reported a slightly improved 8.1% vacancy rate and 83,669 sf of positive absorption in the past six months. In comparison, off-campus space reported an 11.1% vacancy rate and recorded 25,493 sf of negative absorption.

Rendering of the University of Minnesota Ambulatory Care Center

Changes to the Delivery Model
Over the past few years, the major healthcare providers, large systems and independent practices have all been preparing for the arrival of healthcare reform. During this time, the model for how healthcare services are delivered in the United States has been transformed. Today, the respective parties involved have all realized that patient care needs to be moved out of the hospital campuses wherever possible and moved closer to the patient for convenience.

About 180,000 Minnesotans have gained health insurance as a result of the Affordable Care Act (ACA), mainly through enrollments in government-sponsored coverage such as Medical Assistance and MinnesotaCare. This is an integral part of healthcare reform and is anticipated to drive larger volumes of people into the healthcare system. In response, and in an attempt to serve this larger pool of patients, the major systems are restructuring their delivery models to make patient care more convenient as well as providing care options that are more appropriate and cost-effective. This has involved the creation of urgent care, transitional care and ambulatory care facilities located closer to where people live or seek other routine services.

Examples of the ambulatory care trend are the Mercy Healthcare Specialty Center in Coon Rapids, the Ambulatory Care Center that the University of Minnesota and Fairview Health Services have under construction on the East Bank campus, and Park Nicollet’s planned outpatient regional center in Maple Grove, which was recently approved.

The goal for all involved is to provide more convenient and cost-effective healthcare to the patients being served. This is accomplished by being better positioned within the market and by offering more flexibility in the services offered (i.e., emergency room, urgency care, clinic, etc.).

Rendering of North Memorial Health Care in Minnetonka

Large Pipeline of Activity
Construction levels in the Twin Cities medical office market are the highest they have been since 2007. As healthcare systems improve their position within the market and organize metro-wide service, they are expanding their existing facilities and building new off-campus centers and clinics.

There are currently 13 medical office projects totaling 903,479 sf under construction in the greater metropolitan area. There is an additional 412,978 sf planned. Of the projects underway, many should come on line in second-half 2014.

Some on-campus highlights include the 120,000-sf expansion at Fairview Ridges Hospital in Burnsville and the 57,479-sf expansion at Fairview Southdale Hospital in Edina. The project in Edina is the sixth and final phase of the iconic Southdale Medical Building complex. The building is being built on a speculative basis.

Seven off-campus projects are under construction. In the second half, construction is expected to be complete on Grove Health West (40,000 sf) in Maple Grove, HealthPartners (52,000 sf) in Plymouth, Plymouth City Center Medical Building (50,000 sf) in Plymouth, North Memorial Health Care (63,000 sf) in Minnetonka, Children’s Hospitals and Clinics (21,000 sf) in Woodbury, Allina Health Oakdale Clinic (10,000 sf) in Oakdale, and HealthEast Clinic (19,000 sf) in Woodbury.

Outlook
Positive absorption is forecast for second-half 2014 as many of these new developments come on line and are already preleased. These projects have been driven by the major systems as they continue to have access to the capital and needed financing. Rents are being pushed upward into the low to mid $20s on all new development. In comparison, rental rates are expected to remain in the middle teens for existing buildings as we witness some flight to quality among tenants.

With healthcare moving to meet customers where they live and work, the on-campus medical office market will look slightly different in the future. Acute care services and the physicians servicing those types of healthcare will dominate the on-campus environment. Additionally, hospital systems may look to provide new or unique services not previously provided as part of repositioning their services to patients.

Despite all the activity, there are still some areas where the future is uncertain. Specialty practice groups, like optical and dental, are still uncertain how they will fit into the overall healthcare landscape as things transition. Up to this point, they have been able to operate independently and somewhat autonomously. They have not been the focus of healthcare systems or hospital systems thus far, but that may change in time.

Strategic partnerships between the few remaining independent practices and the healthcare systems are expected to continue in the future. Additionally, there may be collaborations between multiple independent practices, particularly those from similar specialties, in an attempt to create operating efficiencies and buying power. All involved are carefully navigating the waters of reform to figure out how they can best deliver care to their patients.

As the effects of the Affordable Care Act are better understood in second-half 2014 and into 2015 and multiple new projects come on line, the medical office market is likely to remain in the limelight.

To read more, visit the July 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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