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— Health Care Properties Quarterly — September 2016
Market Update
D
enver’s medical office
market experienced mod-
est improvements in net
absorption, investment
activity and rental rates in
the first half of 2016.
Overall direct asking lease rates
reached $27.31 per square foot
full-service gross, a year-over-year
increase of 25 cents per sf. Although
positive net absorption of 65,793 sf
was recorded in this half of 2016,
direct vacancy increased to 10.3
percent, up 4.7 percent year over
year due to new deliveries with
available space. Year-to-date trans-
action volume reached $38.8 mil-
lion, an increase of 21.3 percent
year over year.
Economic/unemployment.
Economic
indicators in the Denver market
remained strong
in the first half
of 2016. Employ-
ment continued on
its expansionary
path. All-industry
job growth was 2.8
percent on an aver-
age year-to-date
basis through May
over the previous
year. This equates
to 44,100 more jobs
on average than
in May 2015. Job
growth has helped keep the unem-
ployment rate low, which currently
rests at 3.3 percent for Denver
metro and 3.6 percent for Colorado
– both levels well below the “natu-
ral” unemployment rate of 5 per-
cent. Employment
in health care has
also increased with
2.7 percent year-
to-date growth on
average through
May. Health care
employment is
expected to con-
tinue its upward
trend in line with
population growth.
Construction.
Medical office
construction activity continued its
momentum in the metro Denver
area with 137,800 sf under con-
struction and 170,117 sf completed
in the first half of 2016. The most
notable completion is Parkway
Center, a 61,717-sf Class A medi-
cal office building at 4700 Pearl St.
in Boulder, which is fully leased.
In addition, the 45,000-sf Federico
F. Peña Southwest Family Health
Center and Urgent Care by Denver
Health located at 1339 S. Federal
Blvd. opened in April.
Vacancy/availability/absorption.
Positive net absorption of 22,491
sf was recorded in second-quarter
2016, bringing the year-to-date total
to 65,793 sf of positive net absorp-
tion. On-campus buildings recorded
negative net absorption of 5,777 sf
in the first half of 2016, which was
offset by a gain in net absorption of
71,570 sf for off-campus buildings.
“Overall, on-campus leasing has
remained steady the past year, but
we still see private practice tenants
reevaluating the need to be on-cam-
pus when lease expirations come
around,” said Kory Fasing, senior
associate, CBRE Healthcare Services,
Denver. “For many tenants, there is
a strong enough benefit from being
on campus, but for some, it may not
be worth the rental rate premium,
and they may decide to move off
campus to decrease overhead.”
Direct vacancy increased to 10.3
percent in second-quarter 2016
from 9.9 percent in the second
quarter of 2015. On-campus direct
vacancy increased to 8.1 percent,
while off-campus direct vacancy
decreased to 12.4 percent. Overall
availability was flat at 12 percent
in the second quarter, a 28 basis
point decrease quarter over quarter,
resulting in a 1.7 percent spread
over direct vacancy. Off-campus
availability in the Cherry Creek sub-
market decreased over 16,000 sf in
the quarter.
Average asking lease rates.
Overall
average direct asking lease rates
increased quarter over quarter in
second-quarter 2016, paralleling
year-over-year trends. Rate increas-
es have been driven by limited
quality space availability and new
deliveries in on-campus buildings.
“On-campus medical office build-
ing leasing is typically directly
correlated to the success of the
hospital itself. At the most vibrant
campuses, the medical office build-
ings tend to have low vacancy rates
and command the highest rates. In
some cases, these low vacancy rates
in the existing buildings have driv-
en new development of on-campus
Sue Selle
Colorado region
research team lead,
CBRE, Denver
Kay Zhang
Data analyst,
CBRE, Denver
For many tenants, there is a strong
enough benefit from being on
campus, but for some, it may not
be worth the rental rate premium,
and they may decide to move off
campus to decrease overhead.
– Kory Fasing, CBRE Healthcare Services
