Colliers: Medical Office Vacancy Rate Shrinking

Colliers International released its 2015 Medical Office Outlook Report, which points to the trend of “retailization” of healthcare as a key driver behind increased demand for healthcare real estate.
Mary Beth Kuzmanovich_

Colliers International released its 2015 Medical Office Outlook Report, which points to the trend of “retailization” of healthcare as a key driver behind increased demand for healthcare real estate.

In fact, medical office vacancy rates are at the lowest level since the recession, at 10.9 percent in the U.S., and continue to decline. However, the market is bifurcated with higher vacancies in older, less adaptable buildings.

“Despite uncertainty regarding the full impact of the Affordable Care Act (ACA), overall tenant demand for healthcare real estate continues to increase,” Mary Beth Kuzmanovich, Colliers International’s national director, healthcare services, told Commercial Property Executive. “That demand is supported by expectations of an increase in the number of people insured and the aging of the large baby-boom population.”

During the recession, healthcare providers were reluctant to take on additional space, to conserve limited capital and to avoid increased operating expenses. This created pent up demand.

“At the same time, developers and lenders were cautious about building speculative space. This resulted in little supply entering the market,” Kuzmanovich said. “With the recovery steady in 2014, the demand for healthcare space, especially in off-campus, ambulatory care and retail settings, surged faster than new construction so there was steady absorption.”

According to Kuzmanovich, markets with the lowest vacancy rates are generally small, Southeastern markets (e.g. Charleston, S.C., Greenville, S.C.); those with little or no construction activity in recent years (e.g. Savannah, Miami); and markets with favorable economic and demographic trends (e.g. Boston, Seattle, Portland, Ore.).

“Markets with particularly large, growing 65+ populations should benefit from increased demand going forward, as the 65+ age group accounts for at least $0.50 of every $1 of healthcare spending,” she added. “Of the markets included in Colliers’ report, the fastest growth among the 65+ cohort from 2014-2019 is expected to occur in Houston, Charleston, S.C., Denver, Dallas-Fort Worth and Nashville. The largest absolute changes in the 65+ cohort are expected to occur in Los Angeles, Chicago, Houston, New York-Manhattan and Dallas-Fort Worth.”

This all amounts to the sector expected to remain strong in the year ahead. The report theorizes that with interest rates remaining low, investors have ready access to capital, so more investors who previously were not active in the healthcare real estate space are becoming interested in medical office properties because of the property type’s historical relative stability compared with other asset types as well as favorable demographic trends.
Still, Kuzmanovich opinioned, healthcare real estate occupancy, demand and development is likely to remain steady in 2015 but is subject to increasing uncertainty in the future as the healthcare industry is threatened by significant financial challenges.