CREJ - Healthcare Properties - October 2017
Denver’s medical office building market remains an attractive niche with solid fundamentals in the first half of 2017 due to strong demand for quality space and favorable demographic trends, according to a recent report on the metro area’s medical office market. CBRE’s report on the first half of 2017 noted that Denver’s overall vacancy rate decreased to 9.4 percent, down 96 basis points year over year. The decline in vacancy rate is mirrored in the overall U.S. medical office vacancy rate, which was 8 percent, according to CBRE’s look at the national medical office market. The decline is seen from the growth in the aging U.S. population, pressure for health care providers to cut costs and new technologies boosting demand for medical office properties in recent years. “The steep increase in the 65-plus population and anticipated greater need for in-office physician services by this group signals a continued increase in demand for health care services and medical office space in the years ahead,” said Andrea Cross, Americas head of office research, CBRE. Within the Denver medical office market, a positive net absorption of 41,091 square feet was recorded in the second quarter, bringing yearto-date absorption to 137,063 sf – a 41.6 percent increase compared with second-half 2016. CBRE noted that off-campus medical buildings have gained in popularity, posting positive net absorption in the last two quarters. The growth in off-campus MOBs is partially due to lower rent and future ownership opportunities. Overall availability remains stable in recent quarters, ending the second quarter at 12.2 percent, with off-campus availability at 13.4 percent and on-campus availability at 10 percent. The report noted that the average direct asking lease rate was $28.04 per sf full service gross at the end of the second quarter – a 2.7 percent uptick year over year. The off-campus average direct leasing rate rose to $27.22 per sf, up 87 cents per sf year over year while the on-campus average rate stood at $29.03 per sf. For comparison, the average direct asking lease rate for general office space in metro Denver was $26.15 per sf FSG. The Denver MOB market continues to experience strong levels of construction activity, according to the report, with 226,600 sf under construction at the end of the second quarter. Construction costs are increasing due to the rising cost of materials and a labor shortage, however, are still lower than many parts of the United States. Investors also remain interested in the Denver medical office market, reflected in “robust” investment activity during the first half of 2017. There has been $72.8 million in transaction volume year to date, up 87.6 percent from first-half 2016. “As investor appetite for health care-related real estate has grown, medical office buildings have emerged as the most popular type within the sector,” Chris Bodnar, executive vice president, Healthcare, CBRE Capital Markets, said of the overall U.S. medical office market. “As yields for traditional real estate asset classes have compressed in recent years, new capital sources, including foreign capital, have entered the medical office sector in search of stability to hedge against any potential correction in the global markets.”