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Denver’s Medical Office Market Shows Signs Of Resiliency In First Half of 2020

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While the MOB market did soften as expected following the onset of COVID-19, strong preleasing is cause for optimism.

According to CBRE’s biannual report on the Denver medical office building market, which covers the first half of 2020, three projects totaling 124,000 square feet were delivered in the first half of the year, with 88.8 percent of the new supply pre leased. At the close of the second quarter, over 344,000 square feet of new MOB space was under construction. One was the 89,000-square-foot MOB at 100 Cook Street in Cherry Creek, which was 100 percent leased to UCHealth upon delivery.

“Healthcare consumers increasingly expect greater accessibility and a better experience when seeking out medical care. In response, healthcare providers continue to develop locations that are easier for patients to access. Outpatient visits to medical office buildings show no signs of slowing down and, due to this growth, MOBs continue to be the most popular property type within the healthcare real estate sector. With fundamentals that are more cycle-resistant than other more traditional property sectors, both tenants and investors are drawn to the consistent stability and positive income growth of MOBs,” said Stephani Gaskins, associate, CBRE.

The largest on-campus project under construction is the 96,600-square-foot St. Joseph Medical Office Pavilion, expected to deliver in fall 2020, which recently pre-leased 8,699 square feet of space to Children’s Medical Center. Another notable build is the Synergy Medical Center, which will bring 90,000 square feet of MOB space to the Southeast submarket in early 2021.

Since the beginning of the year, three MOB properties traded hands for a total volume of $52.0 million with an average price per sq. ft. of $241.80. The largest sale in the first half of 2020 was Ridgeline Medical Campus, which traded for $33.5 million ($244.54 per sq. ft.) to Healthcare Realty Trust.

 

Source: Mile High CRE

 

2019 Medical Office Building Transaction Volumes 50% Higher Than Pre-Recession

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Increasing interest from institutional investors has helped to push the medical office sector to hefty transaction volumes and steady occupancy despite record construction in the second quarter.

A new report from CBRE notes that US transaction volumes this year for medical office properties are 50% higher than their pre-recession levels. Meanwhile, medical-office capitalization rates – a measure of a property’s income as a percentage of its price – have pulled even with those of conventional offices after years of registering higher.

Much of the market’s momentum comes from demographic trends toward longer lifespans and more healthcare consumption as well as a medical-industry shift toward more outpatient care. CBRE defines medical offices as office buildings in which at least half of leasable space is occupied by medical uses such as dental, surgical or special practitioners and services.

GlobeSt.com caught up with Ian Anderson, CBRE’s head of Americas Office Research, for an exclusive interview about the report’s findings on the medical office sector. Here are excerpts from that conversation.

GlobeSt.com: What about the medical office sector is most appealing to institutional investors and why are they jumping into the sector now rather than years earlier?

Ian Anderson: Medical office buildings have been an attractive target for institutional investors for many years, but this current cycle has been unique in accelerating that trend. The current expansion has seen a dramatic transformation in the way commercial real estate is being used, and that sometimes has negatively affected demand for space. That’s particular true for conventional offices, for which demand is influenced by workplace strategies and densification, and for retail space, which is adapting to e-commerce. As a result, many institutional investors have been forced to seek new opportunities that offer attractive returns. This has caused a surge of interest into alternative commercial real estate investments where growth is more robust, such as life sciences lab space, self-storage, and co-living, among others.

Aside from the ‘push’ by investors into emerging, alternative commercial real estate investments, the ‘pull’ of deeply entrenched and highly attractive demand drivers is what is really driving demand for medical office space. Any investor seeking to capitalize on the demographic and consumption trends unfolding in the United States wants to have a position in medical offices. Underlying these megatrends, though, is the continued shift by healthcare systems to provide services in a lower cost setting that is more convenient to the consumer. In other words, allowing consumers to obtain healthcare services near to their home, rather than venturing to the main hospital of a healthcare system. Finally, though, medical office investment is driven by the income derived from these properties, which are frequently supported by a variety of tenants with abundant demand and a reluctance to move upon the expiration of their lease.

GlobeSt.com: What has fueled demand for medical office space in markets where it is strongest, namely Chicago, Atlanta, New Jersey and Nashville?

Ian Anerson: Demand for medical office space varies from market to market due to several reasons. In some instances, we observe higher net absorption – demand – simply as a result of the delivery of new medical office buildings in markets where it is easier to build. For example, there are more medical offices under construction and waiting to be occupied in the Inland Empire than Los Angeles, where it is more difficult to build. In other instances, there are local trends in the healthcare industry, such as a merger between healthcare systems, that may affect demand for space. But generally speaking, higher demand for medical office space by market results from a combination of favorable demographics, either in the form of a growing total population or an existing, abundant elderly population, supported by attractive and growing incomes.

GlobeSt.com: Given the strong trends driving the sector, why aren’t we seeing more construction of medical office buildings? Does the pipeline include more deliveries on par with the record set in this year’s second quarter?

Ian Anderson: Like most types of commercial real estate today, construction of medical offices has remained in check with demand. Not surprisingly, the vacancy rate of US medical offices hasn’t budged by more than 20 basis points in the last two years. In the second half of 2018, we saw construction volume of medical offices drop significantly, which should help boost rent growth for investors in the near-term. Then construction activity picked up in 2019 to levels consistent with the average since 2010, but still well-below the peak of construction in 2016.

 

Source: GlobeSt

Life Sciences Space Continues To Be In High Demand, With Low Vacancies And Rising Rents

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Expansion in medical research around DNA is driving growth in the biotech sector and boosting demand for life science space.

Advances in technology over the last decade changed the way medical scientists work, first modeling their theories or ideas on computers before taking them to the bench, according to Steve Purpura, vice chairman of the Boston consulting practice and lead/director of the life sciences practice group with real estate services firm CBRE. As a result, the allocation of lab space in research facilities decreased from a 50:50 office to lab ratio a few years ago to 60:40 today, he notes.

This trend is likely to continue, according to Roger Humphrey, executive managing director and leader of the life sciences group with real estate services firm JLL. Commenting on JLL’s “Journey to the Next Gen Lab,” a report citing a trend toward greater agility in research space design, he noted that wet lab space in research facilities is shrinking, while flex and office space for computational science is growing as scientists spend more time analyzing data. The report shows that flexibility in lab space design and location is required to allow sudden shifts in research priorities and access to talent.

But aggregated demand for highly sophisticated lab space and cutting-edge pharmaceutical production facilities has exploded with expansion of the industry into personalized medicine and increased capital flowing to life science research and development. According to the most recent CBRE life science report, venture capital investments in life science are up 53 percent compared to 10 years ago.

The advent of personalized medicine has spawned a subset of life science industry incubators and early-stage companies focused on developing and manufacturing “small batch” pharmaceuticals, adding pressure to the demand for lab space within or nearby life science clusters, according to Frank Petz, managing director of JLL’s Boston-based capital markets group.

As a result, core life science markets—Boston-Cambridge, San Francisco, San Diego, the Raleigh-Durham Research Triangle and Seattle—are enjoying construction booms and growth in rents, which have escalated more than 50 percent over the last three years, according to the CBRE report.

The boom in funding has also increased competition and furthered the talent war between life science companies.

“The cost of rent is low on the list of their concerns,” says Petz. “It’s all about talent.”

Therefore, locations with premiere research universities and teaching hospitals outside core life science markets are also seeing construction of new research facilities, as life science firms seek STEM talent to fill the growing number of job vacancies.

According to the CBRE report, life science employment soared 23.5 percent to nearly 1.7 million workers between 2001 and 2016, compared to 10.2 percent for overall U.S. employment. Additionally, the rapid pace of technological advancement in the life science sector generated a 26 percent surge in biotech jobs between 2013 and 2016.

Urban markets with premiere universities and teaching hospitals, such as Philadelphia and New York City, have growing life science clusters because they offer the largest STEM talent pools, according to Purpura. While developers are replacing obsolete buildings in these markets with 10-story research facilities, office and industrial buildings in suburban markets, specifically San Diego and Raleigh-Durham, are being converted to lab space.

Humphrey also stresses the need to build flexibility into research space, so scientists can easily reconfigure workspaces to accommodate different types of research and facilitate collaboration with colleagues.

Mobile benches and unassigned workspaces, for example, allow for fast changes in personnel and type of work performed, he notes. In addition, hanging retractable electrical cords from the ceiling, so users aren’t limited to placing equipment against walls, and hiding technical infrastructure behind facades can allow easy movement of people and equipment.

 

Source: NREI