The QuantumCRE Digest
Southeast Medical Office Market Report
Metro Atlanta – Atlanta’s specialty use medical office building market is alive and well. The market encompasses roughly 721 multi and single-tenant medical office buildings, totaling over 24.1 million square feet. These medical office buildings, both “on” and “off” hospital campuses, are specialty built for the medical community. Non-primary use medical office buildings including traditional office buildings, business parks, and the growing retail sector are not included in our analysis. While accommodating some medical uses, these properties do not provide the referral basis and services of a professionally run medical building. This pseudo-market could be several million square feet; a fraction of the total amount of vacant retail and primary use office space in Metro Atlanta.
There are ten primary areas of medical space in Atlanta, the largest being the Northwest Atlanta submarket with over 4.3 million square feet. The other five largest submarkets include Central Perimeter, North Fulton, Northeast, Northlake, and South Atlanta, all with over 3 million square feet each. Interestingly the Urban Corridor including Buckhead, Midtown and Downtown contain less than 2.5 million square feet total (not including the on-campus medical office buildings of Piedmont Atlanta Hospital totaling approximately 900,000 square feet). This very densely populated corridor in terms of employers and households may be underserved by the medical community. We anticipate a large medical office building to be announced by years end.
The first half of 2017 was active with new medical office facilities being completed. Through mid-year 2017 there were 5 new medical office buildings delivered totaling 112,877 square feet; over 100,000 square feet was pre-leased at approximately 92% occupancy. Rental rate information has been withheld, however, our market research indicates rates of approximately $24.00 per square foot gross. The most notable deliveries include 738 Old Norcross Road, 17,000 SF located near Gwinnett Medical; 1233 Highway 54, 30,000 SF located contiguous to Piedmont Fayette Hospital and; Locust Grove Physician Center, 40,000 SF in the Southeast, I-75 corridor. We anticipate several deliveries by year end 2017 including the 91,500 SF Forsyth Physicians Center, off-campus of Forsyth Northside Hospital, at 100% preleased at quoted rates of more than $30.00 per square foot, gross.
Absorption, the net difference in the amount of space occupied between two periods, was positive through mid-year 2017. In fact, the net 463,323 square feet of positive absorption was the greatest amount for the first half year for the past 10 years. With current market demand and anticipated pre-leased deliveries, Quantum Commercial Real Estate (QCRE) anticipates year-end 2017 absorption to surpass 750,000 square feet, topping the boom years prior to 2008 and subsequent meltdown of all commercial real estate. The South Atlanta submarket had the overall greatest absorption levels of over 137,000 square feet through mid-year followed by Northwest and North Fulton at over 83,000 square feet each. One market, the Central Perimeter including medical office buildings at Pill Hill, did report negative absorption of just under -3,300 square feet.
The current overall vacancy rates for medical office buildings at 11.1% continue to decline. Down by nearly 2 percentage points from 2015, these rates are the lowest in at least the past 10 years. With continued positive absorption possibly outpacing deliveries, QCRE predicts further decline to about 10.7% by years end. As rent rolls continue to improve, Landlords are becoming less inclined to offer concessions of just a few years ago. Lease concessions in terms of free rent and improvement allowances are becoming more difficult to negotiate. Not all markets are equally healthy. The highest vacancy rate at over 17.2% is in the 3.2 million square feet Northeast Atlanta Market with an available inventory of over a half million square feet, also the largest amount of vacant square feet of any submarket. Conversely, the Midtown and Downtown Submarkets have vacancy rates at a very unhealthy 1%, thus limiting availability, options, and concessions. As population and employment density continue to grow in this corridor, we anticipate new medical options in non-traditional medical buildings.
Short-term, rents have been relatively flat for the past 6 quarters. At midyear, 2017 quoted rental rates averaged $21.64 per square foot. The most expensive being Downtown at $34.75 per square foot followed by Central Perimeter and Buckhead at $27.67 and $26.78 per square foot respectively. These rates are an average of both modified gross and full service. Full-service rates will include base rent and expenses while modified gross rates are net of expense with the tenant paying separately for utilities, janitorial, taxes, building insurance, and common areas (TI-CAM), which can add $7.00 to $9.00 per square foot to the lease rate. Be mindful to compare like kind quoted rates. Many of Atlanta’s largest medical office buildings are quoting over $30.00 per square foot gross and/or gross equivalent after adding expenses. Mid-term, rents are up by $1.40 per square foot from 2012, however, long-term, are still down from 2008 highs of over $22.50 per square foot. QCRE predicts average rates to match 2008 highs in 2018.
Notable leases through mid-year 2017 include: Pediatric Associates of Lawrenceville (10,000 SF, Lawrenceville, GA); North Atlanta ENT & Allergy (25,500 SF, Forsyth Physicians Center, Cumming, GA); Children’s Healthcare of Atlanta (46,000 SF, Harvard Bldg, Chamblee, GA); Georgia Urology (13,500 SF, East Cobb Medical Campus, Marietta, GA); Horizon Urgent Care (9,000 SF, Hillandale Physician Place, Conyers, GA); and Associated Oral Specialists (9,600 SF, Doctors’ Center at St. Joseph’s Hospital, Center Perimeter, Atlanta, GA) among others.
For a complete report of supporting data and/or request for a market study, please give us a call or email Richard L. Smith, Jr., CCIM. Quantum Commercial Real Estate can also provide full market research studies including available spaces, lease rates, operating expenses, sales comparable data, demographics, and tenant rosters on medical office buildings across the Southeast Region. Buy, build or lease, we work with healthcare professionals evaluating real estate options.
Quantum Commercial Real Estate (QCRE) is a full service commercial real estate firm offering Brokerage, Development, Investment, and Management services. With years of experience in healthcare real estate related transactions and locations in North and South Atlanta, QCRE has the expertise to assist you. For more information and to discuss your needs with a Quantum Commercial Real Estate Representative, contact 770-462-2002 (North Atlanta Office), 770-486-8200 (South Atlanta Office), or visit QuantumCRE.com.