CREJ - Healthcare Properties - September 2016
The Colorado Springs’ medical office market has been very active over the past couple of years and is currently seeing a few notable trends that will have long-term impact in the overall marketplace. University of Colorado Health took over the city-run Memorial Hospital in a long-term lease agreement in the third quarter of 2012. That transaction added tremendous stability to the overall marketplace and community, as well as formidable competition to the well-established Centura Health hospital systems in town. In addition to acquiring several independent local practices and strengthening the network and scope of the system, the UCH brand has brought increased legitimacy to the health care systems in Colorado Springs. While this market stands strongly on its own, the network and connection to Denver and the rest of the state has fueled increased expansion and growth. Another factor in the market that will have a long-term impact is that since the 2008 downturn, most of the speculative medical office building product has been leased and there is currently no product under construction on a speculative basis. There are a handful of products either on or near the northern campus of St. Francis and Memorial North that likely will break ground in the next 12 to 36 months. However, until they do, we will see compression in the market from a vacancy standpoint and increases in lease rates, which have remained fairly flat for the past five years (see vacancy chart indicating a current 9.56 percent vacancy and average lease rate chart showing a current average MOB lease rate of $16.21 per square foot). Lastly, CHI, UCH and Children’s Hospital Colorado have announced future development of ground-up projects slated for delivery over the next 36 months. CHI is adding 134,000 sf onto the existing St. Francis Hospital with additions to the emergency room, operating room and intensive care facilities. Construction is estimated to be complete in 2018. Memorial and Children’s Hospital are breaking ground this month on a combined project with a $200 million budget on Memorial’s 100-acre North Campus. The new Children’s Hospital will include 98 patient rooms, 20-plus emergency room beds with room for up to 10 beds to be completed later, eight operating rooms, a sleep study lab, and 10 to 12 beds and exam rooms for inpatient and outpatient cancer treatment. Memorial's 130,000-sf addition will include 20 inpatient beds, eight exam rooms in the emergency department and two operating rooms; it will primarily house women and oncology services to accommodate a significant increase in inpatient admissions and number of outpatient visits. We anticipate future on- and offsite growth of additional facilities and continued tightening of the competitive MOB market into the foreseeable future. The historical perception in the Colorado Springs medical market was that the city played a distant second to Denver’s market. The investment being made by all of the major providers in Colorado Springs sends a distinct message that that has changed.