Market for medical office space looks healthy

Marcus & Millichap expects developers to build more medical office space this year

Oct.October 18, 2015 01:00 PM

Developers will deliver an estimated 8.8 million square feet of medical office space this year.

Construction of medical office buildings appears to have increased from last year’s level, including some built on speculation.

Brokerage Marcus & Millichap reported that U.S. developers are expected to deliver 8.8 million square feet of newly built medical office space this year, up from 7.1 million square feet in 2014.

CoStar Group Inc. reported that medical office vacancy rates nationwide dropped to 8.8 percent in this year’s third quarter from 9.2 percent in the same period last year.

Some developers of medical office buildings are constructing them without any signed tenants, a speculative strategy that had been dormant since the real estate market collapse in the late 2000s.

The speculative component of medical office development is small because most projects need to be 50 percent pre-leased before they advance to the construction phase, said Scott Niedergang, director of the Healthcare Real Estate Group at Marcus & Millichap.

For example, developers this week are expected to detail their plans for a 60,000-square-foot building in downtown Los Angeles, California, for primary medical care and specialty care. The building also may also feature a facility for physical therapy and a pharmacy on the first floor. No tenants have signed pre-construction leases.

Peter Becronis, owner of Wembley Realty Advisors, the developer of the L.A.  medical building, told the Wall Street Journal: “We see building on spec to be a minimal risk … There’s not any large block of space in the area, so this allows health-care providers the opportunity to lease a brand new medical office building built specifically for health care.”

Becronis said the partnership behind the self-funded development expects to break ground in the third quarter of 2016 and open the medical building in 2018.

Assuming their location is a good one with an attractive demographic profile, medical office developers may find themselves “in a good spot to attract a large user and may find someone before they even break ground,” John Wilson, president of Chicago-based developer and building manager HSA PrimeCare, told the Wall Street Journal.

However, as the Affordable Care Act reshapes the delivery of health care, the law is “causing a lot of consolidations of providers, or they’re being purchased by health care systems,” Wilson said. “So there are fewer tenants today, and they need spaces that are not cookie-cutter. That’s why we don’t see a lot of speculative space within the industry.” [Wall Street Journal] — Mike Seemuth

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