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Limited Medical Office Building Inventory in Seattle Drives Rents Up to Fourth Highest in U.S.

Jackson | Main Architecture, Housing Development Consortium, Seattle, King County, Washington D.C., Kansas City, Factory Built Workgroup

By Meghan Hall

The nature of healthcare is changing across the United States, as growing demand for health care services has been driven by an aging population and an increase in the number of people with healthcare coverage. In response, healthcare providers are changing the structure of their care and services in an attempt to create more cost-effective and consumer-friendly care close to major job and population centers. In Seattle, that has meant that rents for medical office space in the city are now the fourth highest in the United States, according to a report by CBRE. Medical office rental rates have grown by 7.1 percent to $32.52 from the second quarter of 2017 to the second quarter of 2018, while rent growth across the United States averaged 1.4 percent over the same time period.

“Traditionally in the past, most medical office users have wanted to cluster around hospitals,” explained Paul Carr, a senior vice president at CBRE. “Off-campus sites used to be much less desirable. Today, while there is still a strong demand for on-campus properties, most hospital and health systems have a strategy where they are trying to deliver their services out to where people live and work.”

The outpatient care center sector has grown robustly both nationally and in Seattle, catering to patients as if they were more like consumers, rather than simply users, of medical services. According to Carr, this had made locations such as shopping centers, which are easily accessible and close to jobs and shopping, popular. This has been apparent in Seattle, where just about 1.5 million square feet of health care-related projects have been completed, putting the city in the top 15 for fast growing population centers with health care research clusters.

Seattle saw 75,652 square feet of medical office construction deliveries between the third quarter of 2017 and second quarter of 2018. As of the second quarter of 2018, the medical office submarket had 150,000 square feet under construction. The current vacancy rate for medical office space in Seattle hovers at around 4.7 percent, although Carr predicts that the market is likely to tighten in the future, with vacancy continuing to decrease and rental rates continuing to rise.

“It’s definitely going to tighten,” said Carr of the medical office market over the next year. “Demand will continue to go up, as many health care providers are beginning to execute growth strategies that they have been planning for a while, and there is very little inventory that is going to come online in the next 12 months.”

Additionally, the medical office market will likely remain stable into the future, even as the overall economy matures and slows, because the medical office product type is not typically overbuilt, explained Carr. Developers are often reluctant to build speculatively, since many pure speculative buildings have struggled while new product directly connected to the needs of a specific tenant have fared better.

“There’s very little spec construction done in the medical office submarket, because it’s a very shell market, relative to the regular office market,” said Carr. “You don’t get oversupply; you don’t see a big drop in vacancies or drop in rates during slower times.”

Carr also attributed the lack of speculative development to the complicated decision-making processes that govern many health care systems and providers, where multi-year discussions can inhibit completions and negotiations.

“The larger groups are substantial enough where they have complex decision-making structures,” said Carr. “They have physicians that weigh in, executive teams that weigh in, their board of directors. For some reason, their decision-making processes are much slower than typical office users.”

Despite this, though, CBRE predicts that the medical office market will continue to grow and evolve from a specialty asset class to a core asset class, thanks to interest by both institutional and cross-border investors. According to Carr, the medical office market has proven itself stable, predictable and consistent — even during market downturns — making it appealing to investors.

“The medical office market follows the trends of the overall market, generally, but in a much more muted fashion,” said Carr. “I think growth will continue even through the next recession due to demographic pressures.”

Although investors were typically wary of the specialization required of medical office buildings, CBRE believes that many will be more willing to do what it takes to mitigate risk, and that the shift of the medical office market from a specialty asset class to a core asset class will happen fairly quickly.

“There has been some trepidation on the part of investors to venture into it because of specialization in terms of infrastructure and in terms of the demands that the tenants have,” Carr said. “But I think because of the advantages [investors] see, they are starting to realize it is worthwhile.”