MEDICAL OFFICE BOASTS STRONG ACTIVITY

• Major medical players position themselves by gaining land control for future growth in fast-growing suburbs

• Demand for off-campus space continues as specialty physicians carve out a niche away from hospitals to expand practices

• Name of the game for healthcare today is patient service and convenience; medical groups are thinking more like retailers

While the general office market struggles, medical office is a bright spot boasting strong activity, primarily in off-campus expansions. Demand for space is expected to continue as the healthcare industry meets the growing needs of the aging population. Overall vacancy for medical office is 9.9 percent, down from 10.4% at mid-year. 

For on-campus vacancy, Fairview Southdale’s is high at 15.5%, followed by Woodwinds at 10.7%. Vacancies in off-campus markets are: Northeast – 16.6%; Northwest – 16.7%; Southeast - 12.7%; and Southwest-2.5%.

Large medical groups are stepping out on the curb and positioning themselves for future growth by acquiring land in fast-growing, outer-ring suburbs. Maple Grove is seeing an enormous amount of interest as major hospital groups have identified it as a hot spot of opportunity in the 94 and future 610 corridors. Fairview Health Services has secured 20 acres in this area with future plans to build an ambulatory care center and medical office building, and possibly a future hospital. Park Nicollet has also purchased 75 acres on the west side of I-94 for expansion, and North Memorial is looking to acquire land in Maple Grove for future expansion. 

Despite all of the interest in Maple Grove, it remains a shallow submarket with little product available. A developer may soon take a stab at new development in that suburb. Another desirable area is Burnsville, however, it has limited land and limited existing space. Land prices around Fairview Ridges Hospital have increased making the cost of entry challenging to developers. Woodbury is also an emerging market that has seen significant activity. The Woodwinds Health Campus is doing well and the area is beginning to see some peripheral development and rebuilding.

Physicians/hospitals redefine their relationships

Demand for off-campus space is increasing as specialty physicians carve out a niche away from hospitals to expand their practices. Lower reimbursements from insurance companies are forcing physicians to find new sources of income. By expanding off-campus and adding services like an Ambulatory Surgery Center (ASC) or Imaging Center, physicians have more control and don’t have to operate under hospitals’ restrictions. This situation is redefining the once clear-cut role between physicians’ groups and owners of on-campus medical space. Traditionally, physicians believed they had to locate on-campus; now many are reevaluating their options. Off-campus rental rates, which average $14.81 per square foot, remain significantly less than on-campus rates at $17.47.

A retailer’s mentality

Medical groups are thinking more like retailers and locating practices near their patients, rather than forcing patients to the central cities for care. They want space that has easy access, lots of parking and high visibility. Retail follows residential development, and medical is following retail.

THE OUTLOOK

Physician groups will continue to evaluate whether to expand off-campus and add services to help generate new revenue. This will continue to change the relationship between physician groups and hospitals. 

Financing new facilities will be challenging, especially if interest rates rise. More hospitals and practices are exploring net lease options and joint ventures to gain more favorable financing options.

Hospital groups will continue to position themselves in key, growing markets, particularly in the western half of the northwest market, where no hospital yet exists. All practice groups are eager to locate in areas with dual-insured rooftops.