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Medical
practices are increasingly looking at whether they need to be located
directly on the campus of regional hospitals. Factors such as patient
convenience, economics and the development of an independent identity for
the medical practice often favor the off-campus solution for some
practices.
Real
estate costs are a significant factor in the debate over on-campus versus
off-campus locations for physician groups. Off-campus rental rates are an
average 10-15% lower than those for on-campus space. Rates vary
significantly by submarket and by medical corridor. Overall, the average
net rental rate for medical office space in the Twin Cities is $15.96,
down slightly from the average rate of $16.17 per square foot at year-end
2002. For off-campus office space the average net rental rate at mid-year
is $14.82 per square foot, up slightly from the year-end figure of $14.69
per square foot. On-campus rental rates declined slightly over the past
six months, to an average $17.35 per square foot at mid-year versus $17.86
per square foot at year-end.
Vacancy
in the medical office market is 9.9% metrowide, a healthy number
especially considering the much higher vacancy rate for general office
space in the Twin Cities. On-campus vacancy is 5.4% across the Twin
Cities, while the off-campus vacancy rate is 13.4%. Only four of the nine
on-campus medical centers tracked by United Properties report any
significant amounts of vacancy, led by Woodwinds Health Campus (15.7%),
Fairview Ridges Hospital (15.5%), Fairview Southdale Hospital (12.2%) and
United Hospital (7.7%). Off-campus vacancy is lowest in the Southwest
submarket, at 7.3%, followed by the Northeast submarket (12.1%), Southeast
submarket (14.2%) and the Northeast submarket (15.3%).
Much
of the medical office development in the Twin Cities is following a
classic retail growth pattern, with new development springing up in
fast-growing outer-ring suburban areas such as Woodbury, Lake Elmo,
Burnsville, Eden Prairie, Plymouth and Maple Grove. Numerous physician
groups are actively staking out positions in these areas, both in
on-campus and off-campus properties.
A
critical mass of health care providers is forming on and around the campus
of the three-year old Woodwinds Health Campus in Woodbury, a
state-of-the-art healing center that is a joint venture between HealthEast
Care Systems and Children’s Hospitals and Clinics. Patient numbers at
the 70-bed Woodwinds Hospital are meeting expectations.
THE
OUTLOOK
Vacancy
among off-campus properties may increase somewhat over the next six
months, as the market adjusts to absorb the more than 160,000 square feet
of new construction coming online.
Physician groups will continue to aggressively pursue new strategies for
expanding their practices, especially in emerging suburban markets where
consumers may feel they are underserved. As physician practices grow more
confident in their ability to carve out specific market niches for
themselves and seek to build their own identities independent of a
specific hospital affiliation, their demand for off-campus medical office
space will grow.
Real estate observers are paying particularly close attention to the
western half of the Northwest submarket, where a highly competitive –
and somewhat fragmented -- market for health care services is emerging. In
the absence of a regional hospital or a major anchor medical center in the
western half of the submarket, health care groups interested in serving
the area are challenged to find the right locations for their new
ventures.
Highlights
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In
the Southeast submarket, leasing activity is picking up in the
emerging Fairview-Ridges Hospital medical corridor in Burnsville.
Oak Ridge East Professional Building, an off-campus property located
at 675 Nicollet Boulevard East, added two new tenants over the past
six months, for example. Minnesota Lung Center took 1,500 square
feet of space at Oak Ridge East Professional Building, and
Orthopedic Consultants relocated from an on-campus site at Fairview
Ridges Hospital to 13,131square feet in the building.
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The
Southwest submarket is stabilizing, even as more development is
coming online. Lease-up in selected new buildings has taken longer
than expected, due in part to the continuing weakness in the
economy. First half moves by physician groups include Minnesota Lung
Center relocating off-campus from Fairview Southdale Hospital into
5,500 square feet of space in the 7450 France Avenue South Building,
which was recently converted into a full-service medical office
building from its previous use as a general office property.
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More
new construction is underway in the submarket and scheduled for
delivery during the second half, including the 48,000 square foot
first phase of the Southwest Ambulatory Center, a joint venture
between Allina Health Care and Abbott Northwestern Hospital located
at the intersection of I-494 and U.S. Highway 169 in Eden Prairie.
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The
60,000 square foot Southdale Medical Center Phase II at 6545 France
Avenue S. is under construction and set to open 50% preleased this
coming fall; and the 28,000 square foot Eden Prairie Medical Office
Building at 800 Prairie Center Drive, Eden Prairie, more than 60%
preleased and set to open later this year.
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New
development is a key to the continuing growth of the Northwest
submarket, where a number of medical groups are competing to achieve
strong market share positions in anticipation of increased
residential growth. Minnesota Gastroenterology, is the anchor tenant
in the City Center III which recently began construction at 15500
– 36th Avenue N. in Plymouth. Arbor Lakes Medical
Center in Maple Grove continues to fill with new tenants, although
approximately 9,000 square feet of space still remains available.
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A
new otolaryngology surgery center, set to open over the second half
of the year on Woodlands Drive just off-campus from Woodwinds, has
attracted a number of different East Metro physician groups
including Minnesota Eye Consultants.
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