Trends in the medical office building market

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DrewStamm

The Greenville/Spartanburg/Anderson market for medical office buildings (MOBs) has performed consistently during 2016, holding true to the trends over the past 12 months.

The vacancy rate has decreased to one of the lowest rates in over a year to 5.35 percent. The market has seen a current negative net absorption rate derived from new construction being delivered to the market. Multiple projects have broken ground since the last two quarters of 2015, causing both vacancy percentages to rise and gross asking rents to fall to a current rate of $11.50 per square foot per year.

This movement indicates that new product is being delivered with attractive deals in place for the tenants. Lending institutions are also offering attractive rates, along with the attractive rates of developable land in our market.

The Class A/B medical office market has seen selective new growth with the addition of six new projects expected during Q1–Q2 of 2016. These projects include Clemson Eye Visual Health and Surgery, ProGrin Dental, Dialysis Clinic Inc. and Ashby Park Pediatric Dentistry, totaling an estimated 43,500SF of a proposed 145,000SF in new construction in the Upstate.
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Build to suit

 

Most of these new projects are being built specifically for the end user. As such, the trend is swinging in favor of the “Build to Suit,” where the site is identified by the tenant, unlike medical offices of the past where developers have built speculative projects on the “best”-suited land often driven by attractive pricing. The current market will have new medical construction being built closer to residential areas and on roads with higher traffic counts and better visibility.

Private practices are still being consumed by public health care, which creates unique opportunities for third-party investors and increases the overall demand for publicly backed MOB assets. These opportunities are currently trading at an average 7.5 percent capitalization rate, which is an equation to evaluate the return on an all-cash purchase based on the income generated. However, these opportunities are primarily seen in specific industries where the opportunity for continued growth in the current location is evident and accessible. These trades often yield deals where the purchase can outlive the building’s expected useful life because of the fast-moving and progressive technology trends in the medical industry.

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Owners: Look out for trades and time

 

Owners of MOBs should take two different factors into account. The first is related to the trade of such properties and the values associated with such a price to build new or lease-dated space. Greenville continues to outperform both Anderson and Spartanburg in the days it takes to sell a valued MOB asset. Current data suggests less than six months for highly valued MOBs to trade with the right deal points in place. These sales are recorded at a 12-month average of $105 per square foot compared to the floating range of upwards of $160-$180 per square foot for new construction. A major component of the trade previously mentioned is not the price for the building, but the income generated and the tenant’s credit.

Secondly, time often is your biggest hurdle if your MOB has become vacant and without a tenant. Research shows that 10 months is the median to secure a new lease in the Upstate. This time is directly correlated to the age, condition and location of the building and only serves as the benchmark. Properties in attractive locations that are well cared for and move-in ready have seen deals signed in 45 days or less.

No shortage of options

 

In summary, the GSA market has seen steady activity within the medical office market and shows signs of a bright forecast. Developers, investors, users and customers have no shortage of options, with over 800 buildings in our inventory totaling more than 7 million square feet and the ability to source the correct location and business of their choosing. The Upstate will continue to see new medical office buildings being built and will likely notice outdated space being converted to the next affordable business trend — or perhaps scrapped to make ready for new construction.

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