Colliers’ analysis of the health care industry and its effect on commercial real estate in the U.S. points to a soaring health care landscape with expected increases in investment and further “retailization.” Colorado follows this national trend presenting a strong performance in 2015.
Along the Front Range, medical office vacancy is 8.6 percent and absorption remains positive. In some areas vacancy is lower, which makes it challenging for practices in need of expansion to find medical office space. Vacancy rate in Midtown is 0.3 percent; North Denver is 4.2 percent; and Fort Collins/Loveland is 4.9 percent. Leasing rates increased 7.4 percent over the last four years averaging $22.81 per square foot in 2015.
This downward trajectory of available lease space will continue in 2016 as the health care industry experiences growth in both employment and the 65-years-and-older demographic. Douglas County has the sharpest increase in health care employment and is projected to have the highest 65-plus population increase over the next 10 years.
Strong performance of medical office sales continued in 2015. Sales volume reached over $290 million as capital continued to flow into the sector and drive cap rates down to 7.16 percent. The strong investor appetite is driven by higher yields compared with other asset classes, low interest rates and a stable tenant base with strong credit. Health care inherently is driven by demand for patient care. The constant nature of this demand renders the health care sector attractive to investors.
The solid fundamentals of this asset class, combined with the projected growth in aging population, are attracting investors not accustomed to investing in medical office buildings. We expect strong demand to continue into 2016, virtually unaffected by the interest rate increase. In Colorado and the U.S., these trends are driven by:
1. More patients having insurance coverage under the Affordable Care Act.
2. More “consumer-friendly” outpatient clinics, such as urgent care centers and retail clinics.
3. Mergers and acquisitions.
Expanded Health Insurance Coverage
In 2015, 140,327 Colorado consumers enrolled or were automatically re-enrolled in affordable health insurance coverage through the Marketplace. We expect health care costs will continue to rise as ACA members are actively using the coverage in which they are paying. Based on these factors, as well as growth projections, it is estimated that health care spending will nearly double in the U.S. over the next 10 years – from $3 trillion in 2014 to a projected $5.5 trillion in 2024.