The demand for medical office space in the Minneapolis-St. Paul area is high. There are no signs that this demand will decrease anytime soon, especially with the aging population and increasing number of patients seeking care outside of hospitals.
Colliers’ latest research shows that uncertainty around interest rates and supply chain bottlenecks have combined to make it difficult for many medical office building projects to be completed before the second half 2023.
Medical providers are also struggling to find enough staff to staff new facilities. Many providers in the Minneapolis region are also experiencing delays in expanding their services.
Louis Suarez is senior vice president at Colliers Minneapolis and an expert on the medical office building sector.
Suarez stated that there is still strong interest to sell healthcare investment in the Twin Cities market. “Healthcare, along industrial, is the most stable sub-type and the strongest sector historically. This trend is continuing.
Suarez stated that despite the steady demand, there will be a decrease in healthcare investment sales due to higher interest rates.
Suarez stated that larger REITS are placing transactions on hold or are not as aggressive as they were in the past. However, not as many medical office building owners are putting their properties up for sale. This has a negative impact on the number of properties available for investors to buy in medical offices.
Suarez stated that there is a gap between what sellers think their buildings are worth and what investors are willing pay. “I believe there is some delta between sellers and buyers. This is slowing down the pace of sales.
This slowdown already occurred in the Twin Cities at the end last year. Suarez stated that much of the debt that was historically funneled into sales of medical offices didn’t flow as freely as it used to at the end last year.
Suarez stated that “some of the largest lenders were out of business at the end of last year.” “There was a halt to what they were putting into the market. This had a dramatic impact on the end of last Year.”
Buyers were looking for medical office space in the Twin Cities last year. They were looking for core-plus assets, larger properties with high-quality tenants who are willing to sign long-term leases.
Individual investors, including many 1031 investors are also looking for smaller medical offices properties that are not located near a hospital campus. These investors are happy to hear that there are more medical offices opening in the Twin Cities region.
This is because many patients are now receiving medical care in outpatient facilities. These medical spaces are convenient and often located in strip malls. Because there is increasing demand for these outpatient centres, developers are building more. However, owners are more inclined to swap vacant offices or retail spaces into healthcare providers.
Suarez stated that there will always be clinics available and smaller properties. They are typically not the size or scale that larger institutional investors are willing to or want to consider, the 10,000-square foot to 20,000-square foot buildings with one or three tenants. These properties might be more appealing to a local investor or 1031 investor than a 150,000-square foot or 200,000-square foot property with higher infrastructure and higher costs.
The challenge for smaller and bigger investors in the Twin Cities is the same: There aren’t enough medical office properties available for sale.
Suarez stated that these properties are often long-term investments. “If they sell on a larger side, it’s usually one REIT selling or changing up a part of their portfolio or adding it.”
Waiting for certainty
What will motivate owners to place more medical office space on market? What will motivate buyers to buy these properties again? Suarez says it all comes down to certainty. Owners and investors are waiting for certainty about interest rates.
Suarez stated that people want to know what the new normal is in terms of interest rates. It might take some time for buyers and sellers to agree on the value of medical properties.
There are also labor issues, particularly on the side of medical providers. Suarez stated that medical groups aren’t as willing to grow today because they are having difficulty finding enough healthcare workers.
Because they don’t have enough staff to staff the new offices, treatment centers, or ambulatory care centres, they are unable to open them. Suarez claims that this has slowed down the growth of healthcare facilities and medical office space in the Twin Cities.
The conversion of empty retail and office space into medical uses is one trend that is increasing the number of healthcare spaces in the Twin Cities. Suarez stated that this trend will continue but added that the space being converted must meet certain requirements in order to be used for healthcare purposes.
He said, “You can’t place a neurologist next door to a nail salon.” “The space must be well-placed. There might not be enough windows. Parking might not be available. You might run into infrastructure issues. You might have issues with the building’s HVAC, electrical system, plumbing, or weight load. You could have problems if you try to install an MRI machine on the second level of an office building.
There is also the equipment that developers and healthcare professionals need in their spaces. They may need to upgrade their electrical system. It could take as long as a year to get the switch gear needed for this. This is also holding back both new and existing medical office projects.
Suarez stated that “the conversions are definitely happening today.” “But you can’t transform any space. It must be the right space.