Twin Cities, MN
Medical Building
23Q4
Accelerating success.
Twin Cities, MN
Key Takeaways
Medical Building
• Vacancy rates rising for some on-campus hospital properties
23Q4
• Low vacancy rate for off-campus Medical Buildings, increasing rental rates • Very low level of new construction projects underway or planned for 2024 delivery • Limited supply is pushing groups to look at repositioning office & retail for medical spaces
Vacancy Rate
YOY
Net Absorption
YOY
Under Construction
YOY
Off Campus Medical Rates (N)
YOY
5.50%
FORECAST
285K SF
FORECAST
84K SF
FORECAST
$18.27/SF
FORECAST
Changing Dynamics
The healthcare real estate sector is witnessing a surge in on-campus hospital property vacancy rates, while off-campus medical buildings enjoy low vacancies and increased rental rates. However, the overall landscape for 2024 shows a scarcity of new construction projects. In response to limited supply, there’s a growing trend of repurposing office and retail spaces to meet the rising demand for medical facilities, showcasing a pragmatic approach to address space shortages.
Economic Indicators
3.20%
Unemployment Rate
Historic Absorption, Deliveries and Vacancy Rates
4.10%
3.88%
Inflation Index in 2022
U.S. 10 Year Treasury Note
Historic Comparison 22Q4
23Q2
23Q4
15,489
15,567
15,775.4
50
160.0
319.4
Under Construction (SF)*
404.4
417.4
84.0
Net Absorption (SF)*
42.5
226.8
284.7
Overall Vacancy
7.60%
5.00%
5.50%
Overall Asking Lease Rates (N)
$17.06
$19.00
$18.96
Off Campus Lease Rates (N)
$17.94
$17.88
$18.27
Total Inventory (SF)* New Supply (SF)*
Source: Colliers, CoStar
Lease Transactions
France Place
Bloomington, MN 20,033 SF
* In thousands An overall re-assessment of the buildings in the market set created an inventory change greater than new supply delivered.
2855 Campus Dr Plymouth, MN 11,745 SF
Flagship
Eden Prairie, MN 44,820 SF
Photo Source: CoStar
Sale Transactions Property Name
City
Building Size (SF)
Sale Price
Price PSF
Date
3010 Denmark Ave
St. Paul
12,593
$4,600,000
$365.28
November 2023
1687 Woodlane Dr
Woodbury
32,711
$9,800,000
$300.00
September 2023
8980 N Hudson Blvd
Lake Elmo
10,053
$2,300,000
$228.79
October 2023
Colliers | Minneapolis-St. Paul, MN | 23Q4 | Medical Building Report
2
Twin Cities, MN
Medical Building
23Q4
Market Pulse The medical real estate market is currently influenced by the push to outpatient facilities, financial pressures, and consolidation trends. The landscape is also impacted by the forecasted scarcity of new medical building options in 2024, which is likely to continue exerting upward pressure on rates. Stabilization of interest rates, coupled with the anticipation of lower rates later this year, is expected to boost transaction volumes. Market conditions are also shaping real estate strategies. The limited availability of new medical spaces is prompting a trend where office and retail spaces are being converted into medical facilities, when feasible. This trend is more pronounced in suburban areas where office vacancy rates are in the teens, compared to off-campus medical space vacancy rates below 5%. Despite the attractiveness of these conversions, there are challenges including infrastructure, parking, and compatibility with existing tenant mixes. Additionally, the market is experiencing a shift in rental rates for medical spaces. With the tightening availability of first-generation Class A buildings, there’s a growing interest in second-generation medical spaces and converted properties. These spaces are now commanding higher premiums than they would have a year ago, as firstgeneration spaces become less available in the market. With no speculative new construction product expected in 2024 we see this trend continuing in the near future.
Off Campus Medical vs Suburban Office
Supply Delivered and Under Construction (UC)
Source: Colliers, CoStar
Source: Colliers, CoStar
Colliers | Minneapolis-St. Paul, MN | 23Q4 | Medical Building Report
3
Twin Cities, MN
Medical Building
23Q4
Vacancy There is a diverging trend in medical building vacancy rates
Despite this uptick in on-campus vacancy, the overall vacancy rate
moving against the historical trends. Vacancy rates on hospital
in the medical building sector remains low, providing fewer options
campuses have increased during 2023 to their highest levels in
for groups looking to relocate or grow.
many years. This rise is primarily attributed to factors such as the aging infrastructure of on-campus buildings, their location, use restrictions, traditionally high operating costs, and the push to more ambulatory point of care. Off campus medical properties on the other hand have seen dramatic decreases in vacancy rates to the lowest levels that we have tracked. This shift is led by the growing preference for outpatient surgical and specialty centers in suburban locations and the lack of new development, reflecting a broader trend in healthcare delivery. Source: Colliers, CoStar
Absorption and Leasing The medical building sector in Minneapolis-St. Paul is witnessing robust demand, a trend underscored by the recent delivery of 320,000 square feet of new medical buildings across the metro area, which are nearly fully occupied. In response to this strong demand and the scarcity of second generation traditional medical spaces, tenants are increasingly exploring conversions of office and retail spaces to meet their location needs. However, the realistic availability of these spaces to be suitable for such conversions is limited. This constraint, coupled with the ongoing strong demand, suggests that supply is likely to lag demand well into 2024, maintaining a tight market for medical real estate in the region.
Local Investment Trends The medical building market in the Minneapolis-St. Paul area
Sales Volume
is currently navigating a challenging financial landscape, predominantly due to high interest rates and difficulties associated with acquiring debt. These conditions are making transactions particularly challenging, as lenders have become more cautious, often only considering lending to investors who can provide substantial deposits or with local relationships. However, looking ahead to 2024, there is an anticipation of a shift in this trend with interest rates stabilizing and projected to decrease. This financial environment is also likely to encourage more owners and Real Estate Investment Trusts (REITs) to recycle their assets, potentially invigorating the market with new investment opportunities and realignments with several large transactions expected and overall transaction volume to increase.
Colliers | Minneapolis-St. Paul, MN | 23Q4 | Medical Building Report
Source: Colliers, CoStar
4
Twin Cities, MN
Medical Building
23Q4
Rental Rates As more on-campus medical space became available, rates for on-campus properties began to decline. This trend can be largely attributed to the fact that the available on-campus buildings are predominantly older stock, which lacks appeal to outpatient services. Consequently, to remain competitive in the face of increasing on-campus vacancies, these properties have had to reduce their rates while increasing Tenant inducements and improvement dollars. The scenario is quite different for off-campus medical buildings. This upward trajectory in off-campus rates is driven by the limited availability of both new product and second-generation medical spaces. The rates for second-generation medical buildings have surged significantly, showing a steep increase of 23.3% year over year. Even with this rise in asking rates, they are still substantially
Source: Colliers, CoStar
below pricing for new buildings coming to market and a fraction of the cost compared to the $32.00 plus proposed rental rates in excess of needed to build new.
Overall Rents (NNN) for New and Old Buildings
Source: Colliers, CoStar
Colliers | Minneapolis-St. Paul, MN | 23Q4 | Medical Building Report
5
Twin Cities, MN
Medical Building
23Q4
Construction Construction deliveries of new medical properties spiked in 2023
options to the market continuing the squeeze on already tight
with over 479,000 sf delivered or under construction. This was
medical building supply The lack of supply, high cost of ground up
partially due to pent up demand created a shock to the system
development, and the long lead times required to source specific
caused by COVID along with very low interest and an abundance of
materials like switch gear have fueled the interest in both retail and
capital in the market. Many of the projects that were delivered in
office medical conversations where possible.
2023 had been planned or started in 2022. As inflationary pressures dramatically raised interest rates and capital became more difficult to source, new projects have been put on hold. The current pipeline for new construction projects has hit one of the lowest levels in many years. Those projects that are currently under construction or about to start are user-driven and will not be adding additional
Medical Office Building Construction Sites Property Name
Address
City
Campus
Total Inventory SF
Available SF
TCO Waconia
820 Village Wy
Waconia
Off Campus
40,000
0
St. Francis Expansion
1700 St. Francis Ave
Shakopee
On Campus
Total
Colliers | Minneapolis-St. Paul, MN | 23Q4 | Medical Building Report
44,000
0
84,000
0
6
Twin Cities, MN
Medical Building
23Q4
Mercy 192,256 SF 6.40% Vacancy Rate Maple Grove 250,000 SF 0.00% Vacancy Rate North Memorial 126,533 SF 12.00% Vacancy Rate
West Health 200,347 SF 4.16% Vacancy Rate
Riverside 269,800 SF 0.00% Vacancy Rate
Methodist 178,202 SF 0.00% Vacancy Rate
Ridgeview 176,758 SF 0.00% Vacancy Rate
Two Twelve Medical Center 187,916 SF 0.00% Vacancy Rate
Unity 122,995 SF 18.50% Vacancy Rate
Abbott 501,662 SF 14.80% Vacancy Rate HCMC 159,461 SF 0.00% Vacancy Rate
Southdale 614,077 SF 16.40% Vacancy Rate
St. Francis 86,787 SF 0.00% Vacancy Rate
Colliers | Minneapolis-St. Paul, MN | 23Q4 | Medical Building Report
St. Johns 254,304 SF 1.20% Vacancy Rate
United 373,373 SF 11.90% Vacancy Rate
Woodwinds 127,041 SF 0.00% Vacancy Rate
Ridges 223,095 SF 2.60% Vacancy Rate
7
Twin Cities, MN
Medical Building
23Q4
Minneapolis - St. Paul | Q4 2023 On-Campus Medical Office Building Market Statistics Map #
Campus
Number of Buildings
Total Inventory SF
Direct Availability Rate
Sublease Availability Rate
1
Two Twelve Medical Center
1
2
Abbott
7
187,916
0.00%
0.00%
501,662
14.80%
0.00%
Vacancy Rate
Vacancy Rate Previous
0.00%
0.00%
0.00%
0
17208
-
14.80%
14.80%
5.80%
(3,814)
(45,176)
$20.22
Availability Rate
Net Absorption Q4
Net Absorption YTD
Avg Office Rent
3
HCMC
1
159,461
0.00%
0.00%
0.00%
0.00%
0.00%
0
0
-
4
Maple Grove
1
250,000
1.70%
0.00%
1.70%
0.00%
0.00%
0
0
-
5
Mercy
2
192,256
8.60%
0.00%
8.60%
6.40%
0.00%
0
(10,717)
$20.53
6
Methodist
1
178,202
0.00%
0.00%
0.00%
0.00%
0.00%
0
0
-
7
North Memorial
2
126,533
12.00%
0.00%
12.00%
12.00%
12.00%
0
(15,231)
-
8
Ridges
3
223,095
4.40%
2.60%
7.10%
2.60%
2.60%
0
2,580
$22.35
9
Ridgeview
3
176,758
0.00%
8.90%
8.90%
0.00%
0.00%
0
0
-
10
Riverside
3
269,800
0.00%
0.00%
0.00%
0.00%
0.00%
0
0
-
11
Southdale
7
614,077
15.40%
0.70%
16.00%
16.40%
15.10%
(4,351)
(6,126)
-
12
St. Francis
2
86,787
0.00%
0.00%
0.00%
0.00%
0.00%
0
0
-
13
St. Johns
4
254,304
4.50%
0.00%
4.50%
1.20%
0.00%
(3,057)
181
$22.50
14
United
7
373,373
15.30%
0.00%
15.30%
11.90%
10.50%
(2,600)
(5,315)
$20.83
15
Unity
3
122,995
26.60%
0.00%
26.60%
18.50%
19.20%
0
801
$21.50
16
West Health
3
200,347
1.76%
2.40%
4.16%
4.16%
1.50%
0
(5,329)
$25.00
17
Woodwinds
2
127,041
0.00%
0.00%
0.00%
0.00%
0.00%
0
0
-
Total
52
4,044,607
(13,822)
(67,124)
$21.85
For More Information Misty Bowe, CCIM
Senior Vice President Healthcare Services 952.897.7713 misty.bowe@colliers.com
Brian Bruggeman, CCIM, SIOR Senior Vice President Healthcare Services 952.837.3079 brian.bruggeman@colliers.com
Louis Suarez, CCIM, SIOR Senior Vice President Healthcare Services 952.837.3061 louis.suarez@colliers.com
1600 Utica Avenue South #300 St. Louis Park, MN 55416 colliers.com/msp
Copyright © 2024 Colliers The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.