Outpatient Projects (September 2007)

Long-term outlook bright for MOBs

FAVORABLE DEMOGRAPHICS WILL CONTINUE TO DRIVE THE SECTOR, REPORT FINDS

 

By Murray W. Wolf and Sonja Pedersen-Green

The long-term outlook for the medical office sector remains bright thanks to strong tenant demand generated by the healthcare needs of America’s aging population.

That was the conclusion of a midyear medical office research report recently released by Marcus & Millichap’s Healthcare Real Estate Group.

During the next decade, it is anticipated that the U.S. 55-plus population will increase 25 percent, or by 15 million individuals. Healthcare real estate developers and investors have responded to demand from almost every facet of the healthcare industry with record levels of medical office construction in almost every major U.S. market, the Marcus & Millichap report stated.

It is anticipated that developers will deliver 14.5 million square feet of medical office space in 2007, and increase of 9.5 percent from 2006. That rate is also well above the annual average of nearly 8.6 million square feet brought online during the past five years. Consequently, medical office vacancy rates are expected to rise temporarily as new inventory is delivered, the report found.

The Southwest/Mountain region will lead the nation in medical office construction this year, according to the report. That region will account for 3.8 million square feet, or 26 percent of all new medical office space nationally.

The next busiest regions for construction are projected to be the Midwest (3.1 million square feet), the West (2.9 million square feet) and the Southeast (2.8 million square feet). The Northeast is anticipated to add 1.1 million square feet – a small amount relative to the other regions, but an increase of almost 28 percent from 2006.

Vacancy rates are rising

Deliveries in the Northeast and Midwest regions have pushed the nationwide medical office vacancy rate higher during the past 12 months, the report found.

“Looking forward, elevated construction activity will nudge vacancy up 10 basis points by year end to 9.7 percent,” the report predicted.

The highest medical office vacancy rates are in the Midwest (11.9 percent), Southwest/Mountain (11.7 percent) and Northeast (10.3 percent).

Despite rising vacancy rates, rents are on the rise.

“Increasing tenant demand for medical office space, coupled with the prevalence of new, high-end Class A space, has pushed nationwide rents higher,” the report found. Average asking rents are forecast to increase 4 percent to $23.73 per square foot by year end.

The highest asking rents are in the West/Pacific Northwest ($29.06 per square foot), Northeast ($24.15 per square foot) and Southeast ($22.24 per square foot).

Despite all the new construction, the report predicted that the long-term need for medical office space will keep supply and demand in balance. Average asking rents are forecast to increase at a “moderate” pace.

“Investor demand for medical office properties will remain elevated,” the report states, noting that heightened competition among investors has caused recent cap rate compression. Cap rates currently average in the high-6 to low-7 percent range, according to the report.

During the past year, transaction velocity (the number of MOB sales), has increased 9 percent, and the median sales price has risen 6.4 percent to $200 per square foot, according to the report. MOBs in California, Arizona and Nevada have recently been sold for more than $400 per square foot, including one property that was sold for $661 per square foot. At the other end of the spectrum, some Midwest MOBs recently sold for less than $150 per square foot.

(For details, please see the chart below, “Recent medical office sales highlights.”)

There was a sharp rise in MOB prices and a sharp decline in cap rates from 2003 to 2006. But those trends have moderated this year. Overall MOB prices have leveled off and cap rate declines have slowed in 2007.

Although it is anticipated that demand for medical office properties will remain strong, the report warned that recent increases in the cost of capital could cause a near-term increase in cap rates.

MOBs have gone mainstream

The report also noted that “medical office properties have clearly become mainstream for private and institutional investors,” whereas they were perceived in the past as a higher-risk specialty asset.

“Long-term leases and low tenant turnover, combined with a stable market outlook and advancing medical technology, point to a positive future,” the report stated.

Even before the recent cut in interest rates by the U.S. Federal Reserve, the report concluded that the U.S. economy is strong and will benefit the healthcare real estate sector. Education and healthcare services are forecast to be the leading sectors for job creation this year, generating about 500,000 new positions, an increase of about 2.8 percent.

As mentioned above, the aging of the U.S. population is a key driver in the growth of demand for healthcare services. The report noted that the growth of the 55-plus population is expected to grow at a rate of 2.3 percent during the next decade. That’s even faster than that age group’s 1.8 percent growth rate of the past decade, and three times faster than only other age cohort.

Not surprisingly, the metro areas projected to have the fastest-growing 55-plus populations during 2006 to 2011 are all in the Sun Belt: Austin, Texas; the Inland Empire area of Southern California; Phoenix; Orlando; Charlotte, N.C.; Dallas/Forth Worth; Houston; and Atlanta.

“An increasingly popular trend in medical office construction is the development of medical office buildings anchored by ambulatory surgery centers, often in joint ventures with hospitals and physicians,” the report states. “These ventures are perceived as mutually beneficial, as they provide an ownership stake for the physician, while keeping the income stream generated by the surgery center on the hospital’s books.”

San Antonio is busy

Almost half the medical office space slated for completion this year is expected to be in the Southwest and Midwest, according to the report. San Antonio is a prime example of a metro area that continues to add new MOB space.

A number of MOB projects are currently in progress in the San Antonio area, and even more are in the pipeline. For example, San Antonio-based Huffman Development plans to add 80,000 square feet of MOB space to the master-planned community of Stone Oak, a growing area north of San Antonio. Six additional buildings are planned and construction has already begun on the first 24,000 square foot building.

The new construction joins an existing 75,000 square feet of MOB space, most of which is already occupied. The expansion will bring the office park to 155,000 square feet.

In June, Baptist Health System opened an MOB on San Antonio’s west side. The Westover Baptist Medical Office Building accounts for 57,000 square feet of new MOB space in the San Antonio metro area. Christus Santa Rosa Healthcare is also adding space in Westover. Its new medical campus will include a 60,000 square foot MOB.

Even with these projects, there is still demand for more MOB space and more projects are indeed being planned for other parts of the San Antonio metro area. Oaks Development Group of Cary, N.C., plans to build a 105,000 square foot MOB near the South Texas Medical Center in northwestern San Antonio. Methodist Healthcare also recently constructed the 69,000 square foot Methodist Boerne Medical Center in the area.

The majority of these new properties are located in close proximity to major hospital facilities. The city currently has more than 5.3 million square feet of MOB space, with an occupancy rate of 85.3 percent.

That’s lower than the national average occupancy rate of 91.4 percent for MOBs. However, because San Antonio is expected to experience both job and population growth, developers say they are not concerned about overbuilding.

Large MOB planned

in fast-growing

central Florida

OCOEE, Fla. – Brookfield, Wis.-based Hammes Co. and Ocoee-based Health Central plan to expand healthcare services in central Florida with a new five-story, 75,000 square foot MOB. The MOB would connect to Health Central’s existing hospital in Ocoee, located on an 85-acre campus.

Perhaps the most unique feature of the MOB is its efficient alignment with hospital services. The practices in the MOB that correspond to the relevant patient care areas in the hospital will be placed on the same level. For example, OBGYN services would be placed on the same level as the maternity ward. This will allow physicians to easily move between the two buildings, reducing their commute time, according to hospital officials. The physical structure will be post-modern, designed to match the existing Health Central buildings on the campus.

In other Hammes news, the company is also building a new LEED certified, three-story, 34,660 square foot health center in the City Heights section of San Diego. The project is to be called La Maestra Community Health Center and it is being funded in large part by Price Charities, which owns and operates several residential and office properties

Construction is scheduled to start on La Maestra in December. The center would house a family practice and wellness clinic, vision clinic, laboratory, pharmacy, walk-in clinic, literacy program, job training, food pantry, and other medical and social services. The City Heights area is ethnically diverse and has a population of about 78,000.

San Diego MOB

aimed at lowering

acute-care costs

POWAY, Calif. – Pomerado Outpatient Services opened its new five-story, 175,000 square foot MOB in May as part of Pomerado Hospital’s $28 million phase I expansion on the hospital’s campus. The new building is part of a trend by hospitals to add on-campus MOBs that provide some acute-care services in a less-expensive outpatient setting. Building new inpatient space is considerably more expensive.

A second phase of expansion was recently announced. It would include additional MOB space and a five-story, 150,000 square foot nursing tower at a cost of about $176 million. The high cost of the nursing tower, which will double the number of beds at the hospital, is in sharp contrast to the relatively low cost of the $28 million, first-phase MOB.

Furthermore, the average MOB has 80,000 square feet, and the Pomerado building is more than twice that size. Therefore, the cost of the average MOB is somewhat less than the $28 million set aside for Pomerado’s phase I. Phase II is expected to be completed in late 2010 or early 2011.

The developer of the project is San Diego-based Pacific Medical Buildings, which is also working on an on-campus MOB in the San Diego area for Sharp Grossmont Hospital in La Mesa, Calif. The three-story building would have 64,500 square feet.

Ryan Cos. US Inc.

starts new MOB

outside Milwaukee

MENOMONEE FALLS, Wis. – Minneapolis-based Ryan Cos. US Inc.’s Naperville, Ill., office recently began construction on a second 60,000 square foot MOB in the North Hills Medical Centre in Menomonee Falls, Wis., northwest of Milwaukee. The project comes on the heels of the lease-up of a virtually identical building developed by Ryan Cos.

Ryan Cos. plans to complete the new building by November. It is planned as a three-story, 61,000 square foot facility targeted to doctors and medical professionals, including surgical centers, serving the Milwaukee area. The design features 20,000 square foot floor plates and office spaces starting as small as 2,000 square feet.

Milwaukee-based Inland Cos. Inc. is the leasing agent for the building. The agents marketing the space for Inland are Dan Wroblewski, Steve Pape and Joe Lak.

When Ryan’s other MOB at North Hills Medical Centre was completed in early 2007, Menomonee Falls-based Froedtert & Community Memorial Hospital signed a lease for the entire building. The integrated hospital system plans to use the space for primary care and outpatient services such as medical imaging, laboratory and comprehensive rehabilitation, as well as other specialty diagnostic and treatment services. The space currently is being built-out to Froedtert’s specifications; the hospital is planning to occupy the building in January 2008.

 

 

Massive building

to be a ‘gateway’

in Brookfield, Wis.

BROOKFIELD, Wis. – A plan for a four-story, 127,000 square foot multi-purpose office and MOB was approved in August by the Plan Commission in Brookfield, Wis. The building, to be called Fountain Brook Crossing, is planned for a prominent intersection in the Milwaukee suburb, creating what is being called the city’s “southern gateway.”

The next step is for the Brookfield Common Council to consider the proposal, which calls for the approval of a planned development district to allow a building of such size. The 97-foot-tall building would tower above the next-tallest building in Brookfield, the 54-foot Country Brookfield Suites. Even so, the MOB’s square footage, not its height, required the zoning changes. Without the rezoning, the building would have been limited to 27,000 square feet.

The building would include, in addition to its four stories of office and MOB space, two levels of underground parking, a rooftop garden, numerous fountains, and many “green” features. The developer is developer Bill Hoeg of New Berlin, Wis. A hotel and water park as well as other development, is planned adjacent to the site.

Lillibridge starts

MOB project

in Sebring, Fla.

SEBRING, Fla. – Construction started in August on a new MOB adjacent to Florida Hospital Sebring – Heartland Medical Center, in central Florida. The developer of the future 40,517 square foot facility is Chicago-based Lillibridge, which has completed previous projects and is in the process of developing additional MOBs for the Florida Hospital system.

The MOB, which is to be called the Florida Hospital Medical Pavilion, will be the first outpatient facility on the hospital campus in Sebring. It is scheduled for occupancy in spring 2008.

Lillibridge is also developing MOBs for the Florida Hospital system in East Orlando and Kissimmee, as well as several other locations.

In other Lillibridge news, a new 67,000 square foot MOB developed by the firm opened earlier this year in Reading, Pa., on the campus of St. Joseph Medical Center. The St. Joseph Medical Office building was completed in seven months.

The facility includes a new cancer center, vein center, and a physician practice focusing on women’s services. The hospital has relocated some services to the new building as well.

 

 

For the Record

Dayton, Ohio-based Miller-Valentine Group recently announced that it will continue its build-out of the University Pointe health campus in growing West Chester, Ohio, north of Cincinnati. The latest project is planned as a 100,000 square foot, four-story MOB. University Pointe is a healthcare campus that is to include the future West Chester Medical Center, a 160-bed hospital slated for completion in 2008. Miller-Valentine is developing the campus with University Physicians and Cincinnati-based Health Alliance, a six-hospital health provider… Brookwood Medical Center in Birmingham, Ala., recently notified state officials of its plans to construct an MOB on its campus. The MOB would be connected to the hospital with a pedestrian bridge. The hospital says the bridge will not cost more than $4.5 million, but it does not yet have a cost estimate – nor a size estimate – for the MOB. A hospital spokesperson says Brookwood’s on-campus MOBs are currently 98 percent occupied. Brookwood is in the midst of a $63 million capital improvement campaign, which includes the addition of a 44-room patient tower. The state approved a Certificate of Need proposal for the tower in December… All Children’s Hospital in St. Petersburg, Fla., is planning to build a new MOB as part of its $310 million, nine-story, 270,000 square foot new hospital facility… Newton Medical Center in Newton, Kan., recently opened a $12 million, three-story surgical center. The surgical center will be one of several tenants in a new 75,000 square foot MOB. The general contractor on the building project was Wichita, Kan.-based Hutton Construction, and the chief architect was Wichita-based Wilson Darnell Mann… A 60,000 square foot MOB is planned as part of an office park in Albany, N.Y. The project is proposed by Stockton, Calif.-based A.G. Spanos Co., and will also include apartments and other buildings… A new MOB is planned in the southern part of Austin, Texas. The complex, which includes the MOB, will total 35,000 square feet. It is being developed by Austin-based Oxford Alliance Development. The facility is scheduled to open in the first quarter of 2008… Anne Arundel (Md.) Medical Center (AAMC) and Baltimore-based Johns Hopkins Medicine have plans for a 55,000 square foot urgent care facility in Chester, Md., along the state’s Eastern Shore. The facility, which is slated for completion in 2008, would house radiology services, a lab station for blood work, a walk-in medical clinic, and offices for primary care, pediatric, cardiology, and other services. Johns Hopkins Community Physicians is planning to provide medical services in the new facility. The joint venture is part of a partnership announced earlier this year between Anne Arundel Medical Center and Johns Hopkins. q