CREJ - Healthcare Properties - April 2017
Colorado’s health care industry continues to grow and be an accelerator for development and employment. Medical office leases are desirable and investors continue to seek health care real estate assets in Colorado and across the United States. Colorado followed the national trends in 2016 for medical office with low vacancies, positive absorption and increasing rent rates along the Front Range. Vacancy is 10.2 percent, up from the previous year, and rents increased to $27.15 per square foot full service gross. A healthy health care real estate appetite is due to four primary influencers; health care systems monetization of medical office building assets, the perceived low risk with high benefits, strong health care demand and growth in health care employment. • Health care systems’ monetization. In the past, health care systems owned most of their on-campus and off-campus medical office real estate. Changes in health care reimbursement, aging facilities and the need to invest in the endless medical technology improvements have led to several organizations monetizing their assets. In 2016, Colorado-based Catholic Health Initiatives monetized over $700 million of their medical office portfolio totaling over 3.1 million rentable sf. Transferring the burden of real estate leasing, management and operation to a third-party frees up hospital management personnel and resources to enhance patient care. Investment companies are interested in the ownership of medical real estate and are willing to offer attractive purchase prices, particularly for hospital anchored leases. • Perceived low risk and high benefits. Medical tenants often have financial strength, low risk and sign longer-term leases. One reason for a long-term lease is the cost of construction for the interior build out. A second reason is patients’ loyalty is often based upon location, therefore the providers relocate less often. Investor-owners are buying and developing traditional on-campus MOBs as well as off-campus facilities. Off-campus facilities can often provide a cost-effective extension of the hospital’s services. MOB assets are increasingly being viewed as long-term holds, with investors valuing their steady tenant base. One of the most important components of a MOB’s success is recruiting the appropriate tenant mix. Understanding the tenant mix strategic plan provides increased value to providers due to shared referrals and patient satisfaction. The financial strength of a health care system tenant adds additional value for both on- and off-campus facilities. • Strong health care demand. The Metro Denver Economic Development Corp. reported in its January profile that by 2040 Colorado’s population ages 65 and older is projected to double to 1.5 million. Concurrently, life expectancy in Colorado has increased from 77.2 years to 80.4 years since 1990. This demographic shift toward an older population will generate increased demand for health services. Further, the expansion of the insured population in the state will continue to increase the need for health care providers and facilities development. • Growth in health care employment. Health care accounts for the metro region’s largest industry sector for employment at 9.6 percent. This is an increase of 5.4 percent in 2016 and is expected to grow by 43 percent by 2025. The older population requires more health services and the new models of health care reimbursement have increased spending. This creates growth within the health care industry and in return this increases development of health care real estate and continues the trend of investor interest. Many nurses and physicians are among the baby boomers who will start to retire in the next three to five years. The federal government is predicting that by 2020 nurse and physician retirements will contribute to a shortage of approximately 24,000 doctors and nearly 1 million nurses. It will be important for the state, as well as individual communities, to ensure they can attract and retain a skilled workforce to meet these demands. The influence of health care systems monetizing, the perception of risk and benefit as well and demand for health care services and employment will affect health care real estate for many years to come.