Colliers MSP Medical Building Market Report Q4 2023

Page 1

Twin Cities, MN

Medical Building

23Q4

Accelerating success.


Twin Cities, MN

Key Takeaways

Medical Building

• Vacancy rates rising for some on-campus hospital properties

23Q4

• Low vacancy rate for off-campus Medical Buildings, increasing rental rates • Very low level of new construction projects underway or planned for 2024 delivery • Limited supply is pushing groups to look at repositioning office & retail for medical spaces

Vacancy Rate

YOY

Net Absorption

YOY

Under Construction

YOY

Off Campus Medical Rates (N)

YOY

5.50%

FORECAST

285K SF

FORECAST

84K SF

FORECAST

$18.27/SF

FORECAST

Changing Dynamics

The healthcare real estate sector is witnessing a surge in on-campus hospital property vacancy rates, while off-campus medical buildings enjoy low vacancies and increased rental rates. However, the overall landscape for 2024 shows a scarcity of new construction projects. In response to limited supply, there’s a growing trend of repurposing office and retail spaces to meet the rising demand for medical facilities, showcasing a pragmatic approach to address space shortages.

Economic Indicators

3.20%

Unemployment Rate

Historic Absorption, Deliveries and Vacancy Rates

4.10%

3.88%

Inflation Index in 2022

U.S. 10 Year Treasury Note

Historic Comparison 22Q4

23Q2

23Q4

15,489

15,567

15,775.4

50

160.0

319.4

Under Construction (SF)*

404.4

417.4

84.0

Net Absorption (SF)*

42.5

226.8

284.7

Overall Vacancy

7.60%

5.00%

5.50%

Overall Asking Lease Rates (N)

$17.06

$19.00

$18.96

Off Campus Lease Rates (N)

$17.94

$17.88

$18.27

Total Inventory (SF)* New Supply (SF)*

Source: Colliers, CoStar

Lease Transactions

France Place

Bloomington, MN 20,033 SF

* In thousands An overall re-assessment of the buildings in the market set created an inventory change greater than new supply delivered.

2855 Campus Dr Plymouth, MN 11,745 SF

Flagship

Eden Prairie, MN 44,820 SF

Photo Source: CoStar

Sale Transactions Property Name

City

Building Size (SF)

Sale Price

Price PSF

Date

3010 Denmark Ave

St. Paul

12,593

$4,600,000

$365.28

November 2023

1687 Woodlane Dr

Woodbury

32,711

$9,800,000

$300.00

September 2023

8980 N Hudson Blvd

Lake Elmo

10,053

$2,300,000

$228.79

October 2023

Colliers | Minneapolis-St. Paul, MN | 23Q4 | Medical Building Report

2


Twin Cities, MN

Medical Building

23Q4

Market Pulse The medical real estate market is currently influenced by the push to outpatient facilities, financial pressures, and consolidation trends. The landscape is also impacted by the forecasted scarcity of new medical building options in 2024, which is likely to continue exerting upward pressure on rates. Stabilization of interest rates, coupled with the anticipation of lower rates later this year, is expected to boost transaction volumes. Market conditions are also shaping real estate strategies. The limited availability of new medical spaces is prompting a trend where office and retail spaces are being converted into medical facilities, when feasible. This trend is more pronounced in suburban areas where office vacancy rates are in the teens, compared to off-campus medical space vacancy rates below 5%. Despite the attractiveness of these conversions, there are challenges including infrastructure, parking, and compatibility with existing tenant mixes. Additionally, the market is experiencing a shift in rental rates for medical spaces. With the tightening availability of first-generation Class A buildings, there’s a growing interest in second-generation medical spaces and converted properties. These spaces are now commanding higher premiums than they would have a year ago, as firstgeneration spaces become less available in the market. With no speculative new construction product expected in 2024 we see this trend continuing in the near future.

Off Campus Medical vs Suburban Office

Supply Delivered and Under Construction (UC)

Source: Colliers, CoStar

Source: Colliers, CoStar

Colliers | Minneapolis-St. Paul, MN | 23Q4 | Medical Building Report

3


Twin Cities, MN

Medical Building

23Q4

Vacancy There is a diverging trend in medical building vacancy rates

Despite this uptick in on-campus vacancy, the overall vacancy rate

moving against the historical trends. Vacancy rates on hospital

in the medical building sector remains low, providing fewer options

campuses have increased during 2023 to their highest levels in

for groups looking to relocate or grow.

many years. This rise is primarily attributed to factors such as the aging infrastructure of on-campus buildings, their location, use restrictions, traditionally high operating costs, and the push to more ambulatory point of care. Off campus medical properties on the other hand have seen dramatic decreases in vacancy rates to the lowest levels that we have tracked. This shift is led by the growing preference for outpatient surgical and specialty centers in suburban locations and the lack of new development, reflecting a broader trend in healthcare delivery. Source: Colliers, CoStar

Absorption and Leasing The medical building sector in Minneapolis-St. Paul is witnessing robust demand, a trend underscored by the recent delivery of 320,000 square feet of new medical buildings across the metro area, which are nearly fully occupied. In response to this strong demand and the scarcity of second generation traditional medical spaces, tenants are increasingly exploring conversions of office and retail spaces to meet their location needs. However, the realistic availability of these spaces to be suitable for such conversions is limited. This constraint, coupled with the ongoing strong demand, suggests that supply is likely to lag demand well into 2024, maintaining a tight market for medical real estate in the region.

Local Investment Trends The medical building market in the Minneapolis-St. Paul area

Sales Volume

is currently navigating a challenging financial landscape, predominantly due to high interest rates and difficulties associated with acquiring debt. These conditions are making transactions particularly challenging, as lenders have become more cautious, often only considering lending to investors who can provide substantial deposits or with local relationships. However, looking ahead to 2024, there is an anticipation of a shift in this trend with interest rates stabilizing and projected to decrease. This financial environment is also likely to encourage more owners and Real Estate Investment Trusts (REITs) to recycle their assets, potentially invigorating the market with new investment opportunities and realignments with several large transactions expected and overall transaction volume to increase.

Colliers | Minneapolis-St. Paul, MN | 23Q4 | Medical Building Report

Source: Colliers, CoStar

4


Twin Cities, MN

Medical Building

23Q4

Rental Rates As more on-campus medical space became available, rates for on-campus properties began to decline. This trend can be largely attributed to the fact that the available on-campus buildings are predominantly older stock, which lacks appeal to outpatient services. Consequently, to remain competitive in the face of increasing on-campus vacancies, these properties have had to reduce their rates while increasing Tenant inducements and improvement dollars. The scenario is quite different for off-campus medical buildings. This upward trajectory in off-campus rates is driven by the limited availability of both new product and second-generation medical spaces. The rates for second-generation medical buildings have surged significantly, showing a steep increase of 23.3% year over year. Even with this rise in asking rates, they are still substantially

Source: Colliers, CoStar

below pricing for new buildings coming to market and a fraction of the cost compared to the $32.00 plus proposed rental rates in excess of needed to build new.

Overall Rents (NNN) for New and Old Buildings

Source: Colliers, CoStar

Colliers | Minneapolis-St. Paul, MN | 23Q4 | Medical Building Report

5


Twin Cities, MN

Medical Building

23Q4

Construction Construction deliveries of new medical properties spiked in 2023

options to the market continuing the squeeze on already tight

with over 479,000 sf delivered or under construction. This was

medical building supply The lack of supply, high cost of ground up

partially due to pent up demand created a shock to the system

development, and the long lead times required to source specific

caused by COVID along with very low interest and an abundance of

materials like switch gear have fueled the interest in both retail and

capital in the market. Many of the projects that were delivered in

office medical conversations where possible.

2023 had been planned or started in 2022. As inflationary pressures dramatically raised interest rates and capital became more difficult to source, new projects have been put on hold. The current pipeline for new construction projects has hit one of the lowest levels in many years. Those projects that are currently under construction or about to start are user-driven and will not be adding additional

Medical Office Building Construction Sites Property Name

Address

City

Campus

Total Inventory SF

Available SF

TCO Waconia

820 Village Wy

Waconia

Off Campus

40,000

0

St. Francis Expansion

1700 St. Francis Ave

Shakopee

On Campus

Total

Colliers | Minneapolis-St. Paul, MN | 23Q4 | Medical Building Report

44,000

0

84,000

0

6


Twin Cities, MN

Medical Building

23Q4

Mercy 192,256 SF 6.40% Vacancy Rate Maple Grove 250,000 SF 0.00% Vacancy Rate North Memorial 126,533 SF 12.00% Vacancy Rate

West Health 200,347 SF 4.16% Vacancy Rate

Riverside 269,800 SF 0.00% Vacancy Rate

Methodist 178,202 SF 0.00% Vacancy Rate

Ridgeview 176,758 SF 0.00% Vacancy Rate

Two Twelve Medical Center 187,916 SF 0.00% Vacancy Rate

Unity 122,995 SF 18.50% Vacancy Rate

Abbott 501,662 SF 14.80% Vacancy Rate HCMC 159,461 SF 0.00% Vacancy Rate

Southdale 614,077 SF 16.40% Vacancy Rate

St. Francis 86,787 SF 0.00% Vacancy Rate

Colliers | Minneapolis-St. Paul, MN | 23Q4 | Medical Building Report

St. Johns 254,304 SF 1.20% Vacancy Rate

United 373,373 SF 11.90% Vacancy Rate

Woodwinds 127,041 SF 0.00% Vacancy Rate

Ridges 223,095 SF 2.60% Vacancy Rate

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Twin Cities, MN

Medical Building

23Q4

Minneapolis - St. Paul | Q4 2023 On-Campus Medical Office Building Market Statistics Map #

Campus

Number of Buildings

Total Inventory SF

Direct Availability Rate

Sublease Availability Rate

1

Two Twelve Medical Center

1

2

Abbott

7

187,916

0.00%

0.00%

501,662

14.80%

0.00%

Vacancy Rate

Vacancy Rate Previous

0.00%

0.00%

0.00%

0

17208

-

14.80%

14.80%

5.80%

(3,814)

(45,176)

$20.22

Availability Rate

Net Absorption Q4

Net Absorption YTD

Avg Office Rent

3

HCMC

1

159,461

0.00%

0.00%

0.00%

0.00%

0.00%

0

0

-

4

Maple Grove

1

250,000

1.70%

0.00%

1.70%

0.00%

0.00%

0

0

-

5

Mercy

2

192,256

8.60%

0.00%

8.60%

6.40%

0.00%

0

(10,717)

$20.53

6

Methodist

1

178,202

0.00%

0.00%

0.00%

0.00%

0.00%

0

0

-

7

North Memorial

2

126,533

12.00%

0.00%

12.00%

12.00%

12.00%

0

(15,231)

-

8

Ridges

3

223,095

4.40%

2.60%

7.10%

2.60%

2.60%

0

2,580

$22.35

9

Ridgeview

3

176,758

0.00%

8.90%

8.90%

0.00%

0.00%

0

0

-

10

Riverside

3

269,800

0.00%

0.00%

0.00%

0.00%

0.00%

0

0

-

11

Southdale

7

614,077

15.40%

0.70%

16.00%

16.40%

15.10%

(4,351)

(6,126)

-

12

St. Francis

2

86,787

0.00%

0.00%

0.00%

0.00%

0.00%

0

0

-

13

St. Johns

4

254,304

4.50%

0.00%

4.50%

1.20%

0.00%

(3,057)

181

$22.50

14

United

7

373,373

15.30%

0.00%

15.30%

11.90%

10.50%

(2,600)

(5,315)

$20.83

15

Unity

3

122,995

26.60%

0.00%

26.60%

18.50%

19.20%

0

801

$21.50

16

West Health

3

200,347

1.76%

2.40%

4.16%

4.16%

1.50%

0

(5,329)

$25.00

17

Woodwinds

2

127,041

0.00%

0.00%

0.00%

0.00%

0.00%

0

0

-

Total

52

4,044,607

(13,822)

(67,124)

$21.85

For More Information Misty Bowe, CCIM

Senior Vice President Healthcare Services 952.897.7713 misty.bowe@colliers.com

Brian Bruggeman, CCIM, SIOR Senior Vice President Healthcare Services 952.837.3079 brian.bruggeman@colliers.com

Louis Suarez, CCIM, SIOR Senior Vice President Healthcare Services 952.837.3061 louis.suarez@colliers.com

1600 Utica Avenue South #300 St. Louis Park, MN 55416 colliers.com/msp

Copyright © 2024 Colliers The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.


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