CREJ - Healthcare Properties - June 2016
Colorado’s commercial real estate market has definitely had one unbelievable rebound in the last few years in all market sections: existing residential development and sales; multifamily development; retail development; and office development in Denver, Boulder and Fort Collins. We have yet to see new spec office buildings being built in Colorado Springs, however, we have seen some speculative industrial high-cube space being built in the south end of Colorado Springs. Where do medical office buildings stand? There were several sales of medical office buildings last year and there are multiple MOBs on the market presently in Colorado Springs. Last year’s prices do not correlate to this year’s prices. The cap rates on the buildings sold last year ranged from 6.75 percent up to roughly 8 percent. Most of the products being offered now have occupancy greater than 90 percent, with some being 100 percent occupied. Building owners are trying to sell around a 6.5 percent cap rate and there is not a lot of movement at this particular point. Nothing that I am aware of has traded hands. The overall occupancy level on the north end of Colorado Springs is less than 12 percent. There are very few large blocks of space for lease, and the only place for a new tenant to go would be a build to suit. The rents, unfortunately, are not driving up the price of new buildings. Rental rates for Class A office space in Colorado Springs range between $14 and $22 per square foot triple net, with the majority of these spaces being second generation. There is very little shelf space available under 50,000 sf as of May. For building owners of MOBs to take advantage of this market cycle, cap rates will need to rise above 7 percent. We have seen a surge of purchasers of ambulatory surgery centers in the Denver metropolitan area. These, of course, will sell at less than a 7 percent cap rate but typically have seven-, 10- and 15-year leases in place. For instance, in Colorado Springs within the last two years, there have been only two transactions of MOBs between $5 million and $15 million that sold at a 7 percent cap rate – 595 Chapel Hills Drive sold for $8.7 million and 1633, 1625, 1644 Medical Center Point sold as a package deal for $26 million. In Colorado Springs, very few of the buildings being offered have tenants that have signed new 10-year leases. Most are in the middle of a 10-year lease and have anywhere between three and five years left. The good news is there is going to continue to be a demand for second- and third-tier medical office buildings. Not everyone can afford to be on campuses and the large hospital systems do not want everybody there. Until rental rates consistently break $20 per sf, we are not going to see construction of new medical office buildings. If you are an owner of a MOB, you can take the money and run during this cycle or take your chances on renegotiating your tenants in a two- to three-year period when their leases are up.