A look at Denver’s life science and MOB availability

downtown denver
For the last few years, Denver has been one of the hottest real estate markets and fastest-growing economies in the nation.

Terrence Pace
Health care solutions specialist, JLL

As the Denver metropolitan statistical area real estate market heats up, so goes the medical office building market and the life science market. For the last few years, Denver has been one of the hottest real estate markets and fastest-growing economies in the nation.

According to the Bureau of Labor Statics, Denver outpaces the nation in every economic growth category. The unemployment rate in Denver is 2.3 percent compared with 3.6 percent nationally. Also, the average weekly wage in Denver is $1,300 compared with the U.S. at $1,109.

What this means is Denver is attracting good companies, and attracting and keeping the best talent. Denver’s health care and life science sector has some of the brightest minds and most innovative companies in the nation. Because of this growth and the growth of the health care and life science sector, it is becoming more difficult to find appropriate medical office and lab space.

Life Science Market 

The Denver life science market is mainly centered around three main submarkets. Boulder/northwest, Aurora/southeast suburban and West/southwest suburban make up nearly 100 percent of all the life science activity in the Denver metropolitan statistical area.

To find useable space, brokers and users tend to look for second-generation space. Second-generation space is space that was used by a previous company that may have out grown the space, lost funding or the company failed. The attraction to pre-used lab space is the minimal tenant improvement needed and the space is usually ready to be rerented. This is usually a great option if there is quality second-generation space available.

Incubators and startups tend to thrive in Denver, but lack of space and funding often push these companies out once they become established. Although growing, access to capital and reinvestment for life sciences companies in Denver still pale in comparison to cities in coastal states. Often, these more established markets siphon not only funding but also companies and talent as well from the Denver market.

Denver is not standing pat but is actively growing to accept the challenge in this growing sector of the health care market. Located at the southeastern quadrant of the Denver MSA are the Fitzsimons Life Science District and Anschutz Medical Campus, both with lab-ready space. Together, these two areas comprise one of the largest bioscience developments in the entire United States. Upon full completion, the campus will boast one of the nation’s most preeminent and concentrated collaborations of patient care and research-learning centers. Already, more than 16,000 people work within the district; plans estimate a total workforce in excess of 45,000 that will include professions in teaching, patient care and bioscience research and development.

Medical Office Building Market 

Not only is there a lack of quality lab space in the Denver MSA but also we are seeing a need for quality off-campus medical office building space. The major difference between an on-campus and off-campus MOB is the location to a hospital. The major advantage an on-campus MOB has over an off-campus MOB is being on a hospital campus and the proximity to patients and other resources. JLL research is tracking over 12 million square feet of Class A, B and C MOB space in the Denver MSA. There is more than 11.5 million sf occupied with most vacancies coming from outlying areas like Parker/Castle Rock, Lone Tree and Aurora. The data shows more people are opting to stay or move back into urban city centers. Therefore, there is more demand for medical practices and medical offices in Denver communities.

Denver’s economic and population growth has sparked MOB development throughout the MSA. However, there is a lack of medical development in the city limits of Denver. There is 100,000 sf of medical development on the campus of Swedish Hospital, a 110,000-sf medical development at Parker Adventist Hospital and a new MOB development planned for the campus of St. Anthony Hospital in Lakewood. Although the developments are needed, they are located in the outlying areas of the MSA and do not address the growing population in Denver and the need for new medical offices.

One of the reasons development is slower in Denver than other parts of the MSA is the growing cost of raw land and construction. Land and construction costs have been increasing for a while, but it makes it more difficult for investors and developers to pencil in their internal rate of return. One way to help make the numbers work is to increase the lease rate of the building to offset the development cost. The upside for developers and investors is lease rates are increasing between 3 and 5 percent across the Denver MSA. The downside is the rate is not increasing as fast as the construction cost.

Nevertheless, Denver is still seeing strong population growth, a robust economy and the need for more medical professionals who will need a place to practice. Even though new medical developments are slower in Denver, we are seeing signs of improvement from local and national developers. There is a new 30,000-sf medical building planned for the Northfield Stapleton submarket. This will be the newest off-campus medical building developed in the last 25 years in the city of Denver. Due to Denver’s low space availability, we are seeing more construction of medical and life science grade buildings.

Health care and life science is a demand-driven sector, therefore the “Field of Dreams” approach does not work. In order for a medical practice to survive, there has to be demand. Now that demand is here, we are finally seeing more plans for medical and life science developments.

Featured in the October issue of Health Care Properties Quarterly

Edited by the Colorado Real Estate Journal staff.