Boom in Independent Medical Offices Raises Vacancies

Patient convenience, lower real estate costs and the desire for establishing an identity independent of a hospital is luring physician groups to build their own facilities rather than lease from medical office buildings attached to hospitals, according to United Properties, which has broken out the burgeoning medical office market into its own category.

Vacancy in the medical office market is 9.9%, a healthy number compared with the rest of the office market, according to United Properties. On campus vacancy is 5.4%, while off campus vacancy is 13.4%. Overall, there is about 1.7 million sf of on campus medical office space and 2.2 million sf of off campus medical office space, according to United.

The vacancy rates are rising because more traditional office buildings are vying for medical tenants, Brown says.

"Some office facilities wouldn't accept medical tenants--they didn't want all the parking traffic or having snotty nose kids across from their investment tenants," Brown says. "But given the economy, more and more have allowed them in."

Much of the medical office development in the Twin Cities is springing up in fast-growing outer ring suburbs such as Woodbury, Lake Elmo, Burnsville, Eden Prairie, Plymouth and Maple Grove.

"Physician groups will continue to aggressively pursue new strategies for expanding their practices, especially in emerging suburban markets where consumers may fell they are underserved," according to the United report.

Off-campus rental rates are 10% to 15% below those of on-campus facilities. Overall, the average net rental rate for medical office space in the Twin Cities is $15.96 per sf, down slightly from $16.17 per sf at the end of last year. Off campus averaged a net rental rate of $14.82 per sf, while on campus, the average was $17.35 per sf.

As some 120,000 sf of new off campus medical facilities come on line, United expects those vacancy rates to rise.

United defines on campus facilities as those connected by tunnel or skyway to a hospital or major ambulatory surgery center, and off campus as those who are not so connected. "Medical facilities" have more than half of their space devoted to medical-oriented tenants, and they are characterized by a higher parking stall to worker ratio than most office buildings, according to United.