CREJ - Healthcare Properties - April 2017
I think everyone would agree that Colorado’s real estate market has more than rebounded from the 2007-2008 recession. Denver is the fastest-growing city in the country. I’ve lived in Colorado my entire life. I remember driving from Boulder down to Sheplers Western Wear – past Colorado Avenue – there was nothing along Interstate 25 except for Gates Rubber Co. You really didn’t see much until you arrived at the store. After shopping at Sheplers, we would go next door for lunch at the Hungry Farmer. That was the extent of our options. Today there is barely a buildable site left in the Denver Tech Center. Downtown has added unbelievable amounts of new construction – lofts, retail and office space. I could go on and on about what’s been built. The same holds true for Cherry Creek as well as other parts of Denver. The situation for medical office is no different. Hospitals have sprung up, and close to them, medical office buildings. Overall, Denver’s medical office market is robust – numerous health care operators breed a competitive marketplace. Colorado Springs and Pueblo are a different animal than Denver. We’ve seen the construction of many standalone emergency medicine facilities, by UCHealth as well as operators out of Texas that focus solely on such facilities. In addition to UCHealth and Centura, DaVita has become a major player in the Southern Colorado market. A longtime specialist in dialysis centers, it recently acquired Colorado Springs Health Partners as well as Mountain View Medical, giving the company a large piece of an integrated, multispecialty practice market. All three of these juggernauts have been actively purchasing physician practices. These physician groups often co-locate on facilities owned and operated by the acquiring health systems. Freestanding medical office buildings are enjoying strong occupancy rates all over Colorado Springs – many are well past 90 percent occupied. A few standalone facilities are under construction now, all owned by the end-users. A group of internists up at Northgate, led by Dr. Rick Vu, is building a 14,000-square-foot building off of East Woodmen Road scheduled for completion at the end of 2018; it is reportedly 100 percent leased. Additionally, a group of dentists is building a 24,000-sf facility in Northgate. Children’s Hospital Colorado will be occupying a large building soon to be under construction on Memorial’s north campus, set for completion in 2020. Once again, this space will be for providers working in the UCHealth system. Boldt, a developer out of Milwaukee, was quite successful on a joint venture project with Centura Health at Lake Avenue and Venetucci Boulevard, at the south end of Colorado Springs. The building is 100 percent leased; in the building next door, Colorado Springs Orthopedic Group has occupied 20,000 sf, nearly half of the facility. Boldt’s facility with Centura and the Tri-Lakes YMCA, just south of Monument, still has space available. We will probably not see many speculative MOBs built in Southern Colorado because the demand is not quite as high as in other cities along the Front Range. Our top-end medical office lease rates are $20 to $22 per sf triple net, and to build a new building out of the ground, rents need to be in the range of $26 to $28 per sf triple net to justify the cost of new construction. There will, however, still be a demand for stand-alone MOBs. We can’t forget physical therapists, physiatrists, podiatrists, osteopaths, holistic medical providers and chiropractors. These providers will all need medical office space, as patients increasingly seek services from complementary and alternative practitioners. When will the next speculative MOBs come on line in Southern Colorado? We are now projecting that timeline is likely 2019 or 2020. At some point, all the vacant space will be leased, and any large medical group will not have options in this market. When that time comes, somebody is just going to have to swallow the pill and commit to the higher rental rates to have new space. In conclusion, market conditions are improving and lining up to be ripe for a new MOB, but the time to build is not quite yet.