The Paradox of Medical Office Space

paraInvestor demand for medical office buildings (MOBs) is stronger than leasing market indicators suggest – a truism for most commercial property types – due to investors’ search for yield in a low interest rate environment. MOB sales hit an all-time high of $7.1 billion in 2013, up 6% from 2012. Despite rising long-term interest rates in the second half of the year, MOB cap rates held stable at 7.2% in the second, third and fourth quarters of 2013, according to Real Capital Analytics – a sign of sustained investor demand.

In contrast to investment activity, occupier demand for medical office space is feeling the effects of the changing regulatory environment in the health care industry, the rocky implementation of the Affordable Care Act, and the need for health care providers to cut costs in the face of shrinking profit margins. As a consequence, the recovery of the MOB leasing market has trailed even the slow pace set by standard office space.

Consider the following:

  • After peaking at 12.1% in Q4-2009, the vacancy rate for the overall MOB market – both owner-occupied and leased space – has retreated slowly, ending 2013 at 11.0%. The vacancy rate for space added in 2010 or later is slightly higher at 14.4%, suggesting that some newly delivered buildings remain in their lease-up phase.
  • Net absorption totaled 6.1 million SF in 2013, on par with the five-year average of 5.9 million SF but less than half the 2003-2008 average of 13.5 million SF. Buildings completed in the current decade (2010 and later) absorbed about two-thirds of the total, while buildings added in the 2000s absorbed about one-third of the total. Properties added in earlier decades absorbed little new demand as a group.
  • Space under construction ended 2013 at 6.1 million SF, on par with where it has been for the past three years. This is in contrast with other property types where construction activity is ramping up.
  • After a drop of 7.4% from year-end 2008 to year-end 2012, the average asking rental rate for MOB space reversed course in 2013, rising by a modest 1.3%. Contrary to what might be expected, older buildings, which have lower rental rates, held their rates better than newer, more expensive buildings – a sign of the propensity for health care providers to stay put as well as the uncertainty surrounding the Affordable Care Act.

Despite the sluggish leasing market recovery, the long-term outlook for the sector remains strong for several reasons:

  • The aging of the baby boom generation. People over 65 years of age make three times as many physician office visits per year as people under 45.
  • The expansion of treatment protocols developed by the expanding biotech industry. Diseases that used to be fatal are now often considered chronic and can be managed with proper treatment.
  • The provision of health insurance to millions of Americans through the Affordable Care Act, resulting in higher levels of demand for health care services (although the final number remains in doubt due to the problem-plagued rollout of the insurance exchanges)
  • The trend toward shifting care from hospitals to less expensive outpatient facilities including MOBs.

 

Robert Bach Director of Research – Americas

For all your commercial real estate needs, please contact:

Newmark Grubb/Phoenix Realty Group
10739 Deerwood Park Blvd, Suite 310
Jacksonville, Florida 32256
904-399-5222
www.phoenixrealty.net

Florida’s Weekly Headlines

Commercial Real Estate News – January 29, 2014

 

North Florida

Primus Builders doing $11 million project for Sysco in Jacksonville
Jacksonville Business Journal
Print Editor- Jacksonville Business Journal | | | Primus Builders Inc. is doing an $11 million addition and renovation at Sysco International Food Group’s facility in Northwest Jacksonville.

 

South Florida

Coral Gables office building sells for $25.5M
therealdeal.com
Coral Gables office building sells for $25.5M TA Associates of Boston acquires Ponce Circle property

About the Business Parks list
South Florida Business Journal
Research Director- South Florida Business Journal | This list is ranked by the number of acres developed of the land comprising the business park. Flagler Station topped the list, with 879 of its 972 acres developed.

Stonegate Bank to move S. Fla. headquarters
South Florida Business Journal
File photo Stonegate Bank will move its headquarters from this Fort Lauderdale office, although it will keep a branch there.

Lauderdale to get its first Walmart
Sun-Sentinel
Fort Lauderdale has the beach, two airports, an art museum and performing arts center, but it doesn’t have it all. There’s no Walmart.

Construction wages rising, survey finds
orlandosentinel.com
Contractors in Orlando and throughout the state are raising wages and offering benefits to attract and retain construction workers, according to Associated General Contractors of America.

New management for Liberty sites
Financial News & Daily Record
New management for Liberty sites Friday, January 24, 10:38 AM EST by Karen Brune Mathis, Managing Editor

Wal-Mart buys land for Midtown Miami store
South Florida Business Journal
A rendering of the Wal-Mart planned at Midtown Miami. Senior Reporter- South Florida Business Journal

Roundup: Oceanfront hotel in Palm Beach Shores faces foreclosure
South Florida Business Journal
Senior Reporter- South Florida Business Journal | | The SeaSpray Inn near the ocean in Palm Beach Shores could be seized in foreclosure after its loan allegedly fell into default soon after it was made.

Babies R Us Plaza acquired, renovations planned
South Florida Business Journal
Senior Reporter- South Florida Business Journal | | ICM Realty Group said it plans to renovate Babies R Us Plaza near West Palm Beach after buying the property.

 

Tampa/St. Petersberg

Jones Lang LaSalle Hires Key Executives to Industrial T…
Citybizlist South Florida
Firm adds market experts Robert Alter, Luke Pope and Thomas Grandoff as it grows its presence in the region

Commercial Properties: Land sold at I-75, Alico Road
The News-Press
Written by Filed Under ADVERTISEMENT Van University Plaza LLC purchased 18.8 acres of land at the southwest corner of Interstate 75 and Alico Road in Fort Myers from The Cleveland Clinic Foundation, an Ohio not-for-profit corporation, for $4.5 million.

North Port investor poised to lose 44 acres of commercial land
Sarasota Herald-Tribune
Herald-Tribune / Tuesday, January 28, 2014 Florida Community Bank won a $5.4 million foreclosure judgment against Maya Development Company LC, a Clearwater company managed by Noori Lalani.

Flurry of December commercial deals nets sellers $55 million
Sarasota Herald-Tribune
Herald-Tribune / Friday, January 24, 2014 Manatee County commercial real estate agents closed 14 deals for more than $1 million apiece in December. The total generated was $54.8 million.

TerraCap Mgmt Corp Acquires Fairfax Center II
CoStar Group
Investor Sells 64,000 SF in Fort Myers By January 23, 2014 TerraCap Management Corp. acquired the Fairfax Center II

 

Orlando

CNL Names Ex-CBRE Chief as President
GlobeSt
Orlando, Ken Loeber ORLANDO— CNL Commercial Real Estate has named Ken Loeber , former global chief sales officer for

GF Management Affiliate Acquires the 334-key Embassy Suites Orlando – Lake Buena Vista in Florida
Hotel Online
January 27, 2014 8:59am Embassy Suites Orlando – Lake Buena Vista January 27, 2014 – Philadelphia, PA

Cityfeet News – Orlando
©2014 Cityfeet.com – All Rights Reserved | Find Commercial Real Estate Listings – Cityfeet.com

‘Burbs Bounce Back

'Burbs Bounce Back - graph“Reports of my death have been greatly exaggerated,” said Mark Twain, and the same is true of suburbs, where demand for office space has been recovering at a faster clip than in the nation’s central business districts. CBD office markets ended 2013 with a vacancy rate of 13.0%, tighter than the suburban rate of 16.0%. But the spread between the two has narrowed from 4.3 percentage points in the second half of 2009 to 3.0 points at year-end 2013. Moreover, asking rental rates increased last year by around 3.5% in both CBD and suburban markets, although the average CBD rate, influenced by a handful of the nation’s largest, supply constrained markets, is considerably higher at $29.58/SF than the suburban average of $23.90/SF.

This point was driven home to me on a trip to Orange County, Calif., this week, one of the nation’s first and most famous/infamous suburbs. There is no real downtown in Orange County. The Airport Area submarket, with its collection of Class A office towers, probably comes closest, but this is not your pedestrian-friendly big-city downtown. Cars predominate.

The local market suffered mightily from the implosion of subprime lenders, but Orange County has resumed its pre-recession growth trajectory, adding 30,600 net new jobs over the past 12 months and absorbing 2.4 million SF of office space. The vacancy rate fell last year from 15.9% to 13.3%, a decline of 2.6 percentage points compared with 0.7 points in the U.S. overall. The industrial market ended the year with one of the nation’s lowest vacancy rates at 4.5%, well below the U.S. average of 7.9%.

Although asking rental rates are on the rise, landlords are hesitant to raise rates too quickly, unsure of the depth of tenant demand. Tenants, for their part, continue to shop for deals but will often end up renewing in place to avoid moving costs and disruptions. Demand has returned, but this is not a gung-ho market, at least not yet.

Creative space, a concept associated with high-density urban environments, is alive and well amidst Orange County’s low-rise office parks. There are examples of tenants remodeling Class B industrial buildings with striking results.

Suburbs across the U.S. suffered inordinately from the housing bust and the demise of construction jobs. But the housing rebound is pumping new life into suburbs, particularly those with amenities such as Orange County and suburbs that are being redeveloped with walkable, higher density, mixed-use districts to supplement their traditional single-family neighborhoods. Combined with higher cap rates, the leasing market recovery underway in the suburbs may offer attractive opportunities for investors.

Robert Bach Director of Research

For all your commercial real estate needs, please contact:

Newmark Grubb/Phoenix Realty Group
10739 Deerwood Park Blvd, Suite 310
Jacksonville, Florida 32256
904-399-5222
www.phoenixrealty.net

Temp Nation

Temp Nation - graph

Temporary hiring picked up in 2013 both in absolute terms and as a percentage of total new hires. Employers added 247,400 temp jobs last year, up 9.6% from 2012 compared with just a 1.6% gain in total nonfarm payroll employment. Temp jobs accounted for 2.1% of all jobs in December, the highest ratio since the Bureau of Labor Statistics began tracking it as a separate category in 1990 (see graph). Several trends are driving the rise of “temp nation”:

• Employers have been reluctant to hire full-time workers given the sluggish recovery since the Great Recession ended in June 2009. Temp workers give employers more flexibility to meet fluctuating demand for their products and services. This is one reason why temp positions are the first to go during a recession.

• Beginning in 2015, the Affordable Care Act will require employers with more than 50 full-time equivalent employees to provide health insurance to full-time workers, but part-time workers, those working less than 30 hours per week, are exempt. This incentivizes employers to tilt their labor force toward part-timers.

• Temporary assignments often are well-suited to the rapid pace of change in the workplace, driven by technology and the rise of a global workforce. Companies must adapt quickly, and temp positions enable employers to be more nimble in meeting these demands.

The rise of the temp sector most likely is one reason for the sluggish recovery in the U.S. office market. Occupiers are less likely to plan for temps when they calculate their space requirements, or if they do, the space-per-employee ratio is likely to be lower. Temp employment is a subcategory of professional and business services, which includes office-using sectors such as legal, accounting, architects and engineers, consulting and computer services. Although temp employment accounted for 15% of all professional and business services jobs in December, it made up 39% of the jobs added in the sector last year.

Robert Bach Director of Research

For all your commercial real estate needs, please contact:

Newmark Grubb/Phoenix Realty Group
10739 Deerwood Park Blvd, Suite 310
Jacksonville, Florida 32256
904-399-5222
www.phoenixrealty.net

JESAJ buys $4.6 million warehouse on Jacksonville’s Southside

by Michael Clinton, Digital Producer-Jacksonville Business Journal

JESAJ Jacksonville LLC has purchased a warehouse on Jacksonville’s Southside for $4.65 million, the Financial News & Daily Record reports.

JESAJ, an affiliate company of MarJam Supply Co., closed on the 256,720-square-foot facility located at 9446 Florida Mining Blvd. E. July 3.

The former Dura Automotive Systems warehouse sits on more than 19 acres and was built in 1982.
View Press Release

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