Once Left for Dead, Suburban Office Making a Comeback - CoStar Group
About three-quarters of all U.S. office space is located outside the city center in low-rise and medium-rise properties in suburban business centers across the country. During the Great Recession and its aftermath, suburban office markets took an outsized hit.
Some analysts wrote the obituary of the suburban office campus as downsizing companies shed millions of square feet, in many cases consolidating into buildings closer to public transit in urban centers. Suburban vacancy rates spiked above 20% and 30% in many markets.
As the economy has slowly warmed up, the office market recovery has reached into suburban markets, especially ones in so-called "premier" locations where technology and energy related companies are driving demand growth.
Overall, the suburbs have garnered more than their usual share of leasing demand over the past two years, according to an analysis by CoStar real estate economists. Since the beginning of 2012, suburban markets have accounted for a whopping 87% of office demand -- which is 13% more than their 'fair share' based on the total market size compared with CBD office markets, according to data presented at CoStar’s recent third-quarter office review and forecast.
Top-shelf submarkets are driving the suburban office recovery, including Waltham/Watertown in Boston, Northwest Austin, Bellevue near Seattle, and Katy Freeway West in Houston, to name a few, are leading the office recovery. Such markets make up just 19% of the office inventory but drew 29% of the demand over the last six quarters, according to CoStar data.
With all the talk about the shift in office demand to CBDs and tenants moving from suburban to downtown markets, "that's not necessarily happening in spades," noted Walter Page, director of office research for CoStar.
Suburban office absorption tends to perform well during economic booms and recovery periods, while CBD properties tend to perform better during downturns as companies take advantage of lower rental rates to secure space closer to the urban core.
With the recovery in the overall U.S. office market gaining momentum and rental rates increasing in the choicest CBD trophy buildings, more office users are taking a second look at the suburbs, and it's beginning to show up in net absorption.
A diverse set of markets that include Sacramento, San Jose, Austin, Kansas City and Charlotte have posted some of the strongest net office absorption among suburban markets, paving the way for occupancy and rent growth.
Even the long-suffering suburban submarkets of Chicago are seeing rising occupancy and the beginnings of rental increases in their highest quality buildings.
"Tenants are starting to realize if they want Class A space in the northwest suburban market, they have to act soon to advantage of the aggressive economics that have been offered over the past several years," said Jack Reardon of NAI Hiffman in a report on the Chicago area’s suburban office markets.
"There are few options for tenants looking for over 100,000 square feet. Over the next 12 months, demand will continue to increase, pushing rents in the highest quality buildings higher, accelerating the recovery in lower-quality buildings."
Although the vacancy rate hovers over 20% in the East-West Corridor -- the largest of the Chicago suburban markets -- vacancy in the highest quality buildings with the best amenities was only 14%, according to BAI Hiffman’s Dan O'Neill.
Landlords all over the country are noting a similar trend.
"Similar to the [second quarter], we’ve had increasing momentum in suburban office leasing," said Denny Oklak, chairman and CEO of Duke Realty (NYSE: DRE). "The suburban office sector has continued to show more positive trends."
Although national vacancies are in the mid to high teens, net absorption stayed positive for the 14th consecutive quarter and rental rates per square foot are up a few percentage points since the end of last year after nearly five years of stagnant rent, Oklak told investors.
Amid improving fundamentals, Duke Realty signed nearly 1.4 million square feet of leases in its suburban office portfolio in the last quarter, including a 58,000-square-foot lease with Farmers Insurance in South Florida.
Duke saw continuing strong suburban leasing activity in the Midwest, most notably in St. Louis with an 87,000-square-foot lease renewal with Aetna and a 75,000 square foot renewal with a major accounting firm in Indianapolis.
Even developers are becoming active again in certain submarkets such as Raleigh, NC, where Duke this week announced it will build another speculative suburban office project in its Raleigh Perimeter Park development.
Nearly two-thirds of Perimeter Three, a 245,352-square-foot, six-story building, is pre-leased to Teleflex, a medical device company. Perimeter Two in Raleigh, started earlier this year, is now 91% pre-leased and scheduled for delivery in the second quarter of 2014, according to Duke Chief Operating Officer Jim Conner
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Installing Oak Wainscoting At A New Heart & Vein Medical Office
Installing Oak Wainscoting At A New Heart & Vein Medical Office
Thursday, January 24, 2013
Feverish Pace of MOB Development Fueled By Strong Demand, New Occupancy Trends - CoStar Group
Feverish Pace of MOB Development Fueled By Strong Demand, New Occupancy Trends - CoStar Group
The hot medical office building (MOB) market is likely to remain in at least a semi-feverish state as the transition of common medical procedures to outpatient clinics accelerates with full implementation of the Patient Protection & Affordable Care Act, fundamentally changing the nation's health-care delivery system.
Health care was the largest job-creation sector in 2012, with most of the jobs added in ambulatory care facilities, a trend that will continue this year according to Jeffrey Cooper, executive managing director of Savills US.
Continued health-care employment growth, combined with the expected increase in demand for medical crae services from the aging population is expected to continue to drive development of medical ambulatory care facilities, including MOBs, surgery centers, urgent care clinics and diagnostic lab facilities.
"That's where all the growth is going, with the Affordable Care Act kicking in over the next 12 months, including requirements for mandatory coverage," Cooper said. "Health-care systems are really gearing up to handle those patients, and much of it will be through development of non-acute care facilities. In many ways, the ACA will be very positive for health care real estate, helping create demand for outpatient facilities."
While diminished Medicare/Medicaid reimbursements are a risk given the looming threat of federal sequestration spending cuts, most experts continue to view the market's growth prospects favorably.
"We believe strong demographics will win out, and our expectations are for continued strong prospects in the health care sector," said real estate economist Carlos Ortea, who analyzes the medical office property market for Property and Portfolio Research (PPR), a CoStar company.
Despite the number of new projects breaking ground in recent months, CoStar data suggests that MOB development slowed in fourth-quarter 2012 -- though it’s likely more of a pause, Ortea noted.
MOBs accounted for 7% of total office construction in the top 54 markets tracked by PPR, down from 11.5% in fourth-quarter 2011 and below its 10-year historical average of 11.3%. Also, fourth-quarter construction of medical office rentable building area (RBA) under way as a percentage of total medical office inventory was 0.6%, down from 1% in the last three months of 2011 and lower than the 10-year average of 2.3%.
"I would expect that this is a short-term trend," Ortea said. "The delivery of medical office space as a share of total office space has generally climbed in recent years, accounting for 17.7% of total office deliveries from 2007-12, up from its historical trend of 14.6%."
"In the near term, I don’t think oversupply is a problem. But could very well be an issue in the medium to long term since supply has historically doubled that of national office," he said.
Most of the increase is linked to long-term demographic trends, including population growth and the retirement of the baby boom generation. That said, Ortea believes more developers will likely move forward on projects to capture the potential increase in demand springing from the ACA health-care legislation.
The Patient Protection & Affordable Care Act (ACA) requires hospitals to invest in and implement many costly new systems and procedures at a time when they also face lower Medicare and private insurance payments, all of which is forcing them to look for possible ways to cut costs.
Duke Realty (NYSE: DRE), a major developer and operator of MOBs, said in its 2013 predictions this week that implementation of the ACA should continue to drive changes already under way that will affect demand for health-care real estate demand in coming years, despite the recession's lingering aftermath, lower hospital reimbursements and other issues.
Increasingly, MOB developers are expected to design more sophisticated facilities as hospitals move higher-acuity care such as post-surgical recovery and other complex procedures off the hospital grounds, the Indianapolis-based REIT predicts.
Also according to Duke Realty, hospitals are expected to make wider use of "freestanding emergency departments" and urgent care clinics, with operators such as Baylor Health System partnering with specialized for-profit emergency department operators to build new facilities. For-profit companies are also building standalone emergency rooms as an end unto themselves at high-traffic, retail-oriented sites.
MOBs offering higher-acuity and/or non-acute care, for example North Fulton Hospital’s new North Fulton Medical Plaza in suburban Atlanta, cost less to build, operate and maintain than hospitals and inpatient facilities. These outpatient facilities will need to be designed to a higher, more sophisticated standard than typical MOBs, while hospital may also have an opportunity to repurpose vacated space as services move to medical office buildings.
To date, freestanding emergency departments have been mostly owned and operated by hospitals. But mainstream providers such as Baylor Health System have recently announced they are partnering with private interests like Emerus to build dedicated emergency centers. In addition, for-profit companies are building stand-alone FEDs as an end unto themselves, at targeted high-traffic, retail-oriented sites.
"More and more, we’re seeing for-profit [emergency department] companies competing for the typical 7/11, Walgreen’s and McDonald’s sites," noted Don Dunbar, executive vice president of Duke Realty.
Hospitals, health systems and physician groups are increasingly willing to partner with both for third-party companies specializing in a wide range of other health care facilities, including MD Anderson, which is extending its brand across the nation by partnering with local providers on cancer treatment centers; and Community Health Network, partnering with Centerre Healthcare to build rehab hospitals. The real estate implication is that new, expanded or renovated "branded" facilities might be needed to accommodate these partnerships.
Lastly, adaptive reuse of other types of buildings such as offices, retail, industrial spaceand even movie theaters for medical use will become a more prevalent health care and real estate strategy, according to Duke.
"While there might be a dwindling number of vacant Circuit City, Borders and Linens ‘n’ Things stores in the suburbs, there will continue to be other suburban opportunities as chains like Best Buy and even Macy’s downsize," Duke said. In addition, health care reform will force providers to enter into other markets, especially central cities. Kaiser Permanente, Dignity Health and Scripps Health are three examples of health systems that repurpose space for medical use.
"Many are jumping on old grocery stores," giving potential new life to former retail and office buildings, according to Duke Realty's Dunbar.
The hot medical office building (MOB) market is likely to remain in at least a semi-feverish state as the transition of common medical procedures to outpatient clinics accelerates with full implementation of the Patient Protection & Affordable Care Act, fundamentally changing the nation's health-care delivery system.
Health care was the largest job-creation sector in 2012, with most of the jobs added in ambulatory care facilities, a trend that will continue this year according to Jeffrey Cooper, executive managing director of Savills US.
Continued health-care employment growth, combined with the expected increase in demand for medical crae services from the aging population is expected to continue to drive development of medical ambulatory care facilities, including MOBs, surgery centers, urgent care clinics and diagnostic lab facilities.
"That's where all the growth is going, with the Affordable Care Act kicking in over the next 12 months, including requirements for mandatory coverage," Cooper said. "Health-care systems are really gearing up to handle those patients, and much of it will be through development of non-acute care facilities. In many ways, the ACA will be very positive for health care real estate, helping create demand for outpatient facilities."
While diminished Medicare/Medicaid reimbursements are a risk given the looming threat of federal sequestration spending cuts, most experts continue to view the market's growth prospects favorably.
"We believe strong demographics will win out, and our expectations are for continued strong prospects in the health care sector," said real estate economist Carlos Ortea, who analyzes the medical office property market for Property and Portfolio Research (PPR), a CoStar company.
Despite the number of new projects breaking ground in recent months, CoStar data suggests that MOB development slowed in fourth-quarter 2012 -- though it’s likely more of a pause, Ortea noted.
MOBs accounted for 7% of total office construction in the top 54 markets tracked by PPR, down from 11.5% in fourth-quarter 2011 and below its 10-year historical average of 11.3%. Also, fourth-quarter construction of medical office rentable building area (RBA) under way as a percentage of total medical office inventory was 0.6%, down from 1% in the last three months of 2011 and lower than the 10-year average of 2.3%.
"I would expect that this is a short-term trend," Ortea said. "The delivery of medical office space as a share of total office space has generally climbed in recent years, accounting for 17.7% of total office deliveries from 2007-12, up from its historical trend of 14.6%."
"In the near term, I don’t think oversupply is a problem. But could very well be an issue in the medium to long term since supply has historically doubled that of national office," he said.
Most of the increase is linked to long-term demographic trends, including population growth and the retirement of the baby boom generation. That said, Ortea believes more developers will likely move forward on projects to capture the potential increase in demand springing from the ACA health-care legislation.
The Patient Protection & Affordable Care Act (ACA) requires hospitals to invest in and implement many costly new systems and procedures at a time when they also face lower Medicare and private insurance payments, all of which is forcing them to look for possible ways to cut costs.
Duke Realty (NYSE: DRE), a major developer and operator of MOBs, said in its 2013 predictions this week that implementation of the ACA should continue to drive changes already under way that will affect demand for health-care real estate demand in coming years, despite the recession's lingering aftermath, lower hospital reimbursements and other issues.
Increasingly, MOB developers are expected to design more sophisticated facilities as hospitals move higher-acuity care such as post-surgical recovery and other complex procedures off the hospital grounds, the Indianapolis-based REIT predicts.
Also according to Duke Realty, hospitals are expected to make wider use of "freestanding emergency departments" and urgent care clinics, with operators such as Baylor Health System partnering with specialized for-profit emergency department operators to build new facilities. For-profit companies are also building standalone emergency rooms as an end unto themselves at high-traffic, retail-oriented sites.
MOBs offering higher-acuity and/or non-acute care, for example North Fulton Hospital’s new North Fulton Medical Plaza in suburban Atlanta, cost less to build, operate and maintain than hospitals and inpatient facilities. These outpatient facilities will need to be designed to a higher, more sophisticated standard than typical MOBs, while hospital may also have an opportunity to repurpose vacated space as services move to medical office buildings.
To date, freestanding emergency departments have been mostly owned and operated by hospitals. But mainstream providers such as Baylor Health System have recently announced they are partnering with private interests like Emerus to build dedicated emergency centers. In addition, for-profit companies are building stand-alone FEDs as an end unto themselves, at targeted high-traffic, retail-oriented sites.
"More and more, we’re seeing for-profit [emergency department] companies competing for the typical 7/11, Walgreen’s and McDonald’s sites," noted Don Dunbar, executive vice president of Duke Realty.
Hospitals, health systems and physician groups are increasingly willing to partner with both for third-party companies specializing in a wide range of other health care facilities, including MD Anderson, which is extending its brand across the nation by partnering with local providers on cancer treatment centers; and Community Health Network, partnering with Centerre Healthcare to build rehab hospitals. The real estate implication is that new, expanded or renovated "branded" facilities might be needed to accommodate these partnerships.
Lastly, adaptive reuse of other types of buildings such as offices, retail, industrial spaceand even movie theaters for medical use will become a more prevalent health care and real estate strategy, according to Duke.
"While there might be a dwindling number of vacant Circuit City, Borders and Linens ‘n’ Things stores in the suburbs, there will continue to be other suburban opportunities as chains like Best Buy and even Macy’s downsize," Duke said. In addition, health care reform will force providers to enter into other markets, especially central cities. Kaiser Permanente, Dignity Health and Scripps Health are three examples of health systems that repurpose space for medical use.
"Many are jumping on old grocery stores," giving potential new life to former retail and office buildings, according to Duke Realty's Dunbar.
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