Medical Office Lease Activity
The leasing market for medical office space in the Valley for the Second Quarter, 2013 is reporting an increase in the average lease rate from approximately $21.15 per square foot, Full Service, in the First Quarter, 2013 to $21.92 per square foot, Full Service, this Quarter; which consists of 331 buildings over 20,000 square feet for a total of 12,927,690 rentable square feet, according to CoStar. Rental rates and vacancy rents have remained fairly flat for the past two quarters as hospitals and healthcare organizations prepare for the 2014 implementation of the Affordable Care Act (ACA). Many healthcare providers are still trying to understand the impact of the ACA to their business when it is implemented, and are waiting to make long-term real estate decisions.
The Valley is seeing consolidation occur among its hospitals and providers. The recent merger of Scottsdale Healthcare and John C. Lincoln allows for streamlining and/or sharing of services and operations that provide cost containment for each organization. Phoenix Children’s Hospital and Dignity’s St. Joseph’s Hospital and Medical Center combined their pediatric care, offering consolidated pediatric operations and services and therefore, a higher and more efficient quality of pediatric care. Individual providers are shifting in the market as well. While some remain in a “wait and see” mode, many have already joined forces to merge or have already joined larger practices or hospitals; whereas others have elected to retire from practicing medicine altogether.
As a result of consolidation, real estate needs for healthcare organizations have changed. Some healthcare organizations are opting to develop larger and/or specific use properties to house multiple practice types under the same roof, or offer a specialty up-to-date facility that accommodates their operation. Consequently, there is less demand for small provider medical offices. Therefore, this phenomenon is affecting the medical office market with build-to-suit developments by hospitals and/or larger healthcare companies to provide outpatient services rather than absorbing existing vacant medical space. Banner Healthcare and Cigna Healthcare are two that have recently developed specific-use facilities.
Banner Health
Banner Health has developed five outpatient clinics for 2013 that are each 21,000 square feet in size, along with three that opened in 2012. The following are four of these properties.
Banner Health Center in East Mesa
1917 S. Crismon Road
Mesa, AZ 85208
Opening September 4, 2013
Banner Health Center in Chandler
1435 S. Alma School Road
Chandler, AZ 85286
Opening August 7, 2013
Banner Health Center in Gilbert
155 E. Warner Road
Gilbert, AZ 85296
Now Open
Banner Health Center in Queen Creek
21772 S. Ellsworth Road
Queen Creek, AZ 85335
Now Open
Cigna
Cigna moved from an older property located at 755 E. McDowell where they occupied approximately 100,000 square feet, and built a new 95,000 square foot health facility on the former site of an old Qwest property.
Cigna
3131 N. 3rd Street
Phoenix, AZ 85012
Now Open
Source: CoStar
Source: CoStar
Source: CoStar
Source: CoStar
Medical Office Sales Activity
Article: MOB Trades Top $1 Billion in Volume Following Record Quarter (Black Swan Real Estate)
In the Second Quarter 2013 there were 45 medical office sales transactions, 12 of which were multiple property sales, with a sales volume of approximately $48.4 Million; although only five transactions involved medical office buildings over 18,000 square feet in size. According to CoStar, the average cap rate for the Second Quarter 2013 was 8.38%, with an average price per square foot ending the Quarter at $144.08, considerably higher than the First Quarter’s average price per square foot of $67.55.
Four properties sold over $200.00 per square foot. Of those four, two were smaller medical office buildings under 5,500 square feet, and two were larger at 18,872 square feet and 81,875 square feet, selling at $314.75 per square foot and $250.38 per square foot respectively. These were newer buildings constructed in 2007 and 2008, both with occupancies in the mid 80 percentile (83.2% and 84.9%) at cap rates of 7.7% and 8.35 %. This demonstrates that there were fewer distressed sales in the Second Quarter 2013 as the market continues to stabilize.
Please see below for a few of the top medical office sales transactions this Second Quarter, 2013 for buildings over 18,000 square feet.
Lifeprint Health Center, 20414 N. 27th Avenue, Phoenix, AZ 85027
81,875 square feet sold on June 11, 2013 for $250.38 per square foot for a total of $20,500,000 at a cap rate of 8.35%. Built in 2008, Talia Jevan Properties, Inc. purchased this property from Winthrop Financial Associates.
Mountain Ranch Medical Commons, 9780 S. Estrella Parkway,
Goodyear, AZ 85338
8,000 square feet sold on June 5, 2013 for $194.97 per square foot for a total of $3,509,462. Built in 2013, Broadstone Real Estate purchased this property from Irgens Partners. This transaction is “in progress,” according to CoStar, and is part of a portfolio.
East Valley Professional Plaza, 1220 S. Higley Road, Mesa, AZ 85206
18,872 square feet sold on May 15, 2013 for $314.75 per square foot for a total of $5,940,000 at a cap rate of 7.7%. Built in 2007, Campus Professional Plaza, LLC purchased this property from Higley Medical Properties.
Virginia Park Medical Plaza, 333 E. Virginia Avenue, Phoenix, AZ 85004
54,361 square feet sold on May 9, 2013 for $31.27 per square foot for a total of $1,700,000. Built in 1976, Native American Connections purchased this property from EverBank Financial Corp. and was a REO sale.
Senior Housing Supplement
The senior housing real estate market includes assisted living, independent living, skilled nursing and dementia/memory care facilities.
In the Second Quarter 2013, one notable property sold: Arte’, 11415 N. 114th Street in Scottsdale, Arizona, a three story 170 unit senior housing project which opened in 2009. The Reliant Group paid $30 Million ($176,471 per unit) for the property. Business Real Estate Weekly (BREW) reported that Cap VII Scottsdale LLC (fund managed by Reliant) acquired the luxury housing community with a $23.31 Million loan from BOKE (DBA Bank of Arizona). In April 2012 BREW reported the developer of Arte’ defaulted on their $36.25 Million loan by SMA Portfolio Owner, LLC and filed for bankruptcy protection to avoid foreclosure.
Also, Fiesta Village, an 18 unit former senior living facility with 6 buildings totaling 18,558 square feet located at 5602 N. 7th Street in Phoenix, closed on July 16, 2013 for $960,000. The price per unit was $53.333.33 and the Buyer was LCP Holdings, LLC.
New construction is underway on several projects in the Phoenix Metropolitan Area with some recent opening adding to the senior housing inventory.
Premier Assisted Living and Heritage Management of Omaha are partners in a 104,500 square foot assisted living/memory care project at 15048 W. Young Street in Surprise. The total cost to construct the project is $18 Million, and the Omaha group expects to be at 1,000 units owned and operated with the completion in 2013. The 16 unit memory care portion of the project opened in June, and the assisted living portion is expected to open at the end of August 2013. Mark Huey at Telis Commercial Real Estate is the local development partner.
MorningStar at Arcadia, once a four-story concrete structure at the northeast corner of 32nd Street and Glenrosa in Phoenix, will soon become a $25M assisted living/ memory care community. Redeveopment of the property is being completed by a joint venture between RED Group, LLC and MorningStar Senior Living, LLC. MorningStar at Arcadia will provide one and two bedroom suites ranging from 347 to 1,280 SF, along with personalized care, and a range of planned daily activities including restaurant style dining rooms and bistros, 24 hour staffing, weekly housekeeping, and a movie theatre. An Information Center is already on-site and the doors will be opening in October 2013.
Prepared by: GPE Healthcare Investment Group
Kathleen M Morgan, CCIM
480-994-1798
[email protected]
Trisha A Talbot, CCIM
480-423-7916
[email protected]
Julie A Johnson, CCIM
480-423-7933
[email protected]
Photo Credit: “Pen And Business Graph” by jannoon028 FreeDigitalPhotos.net
