Unlike more cyclical sectors such as office or retail, healthcare and medical office development through Illinois hasn’t experienced a significant downturn, largely because of its underlying fundamentals, which are bolstered by the rising demand from the aging baby boomer generation.
“Now, the challenge for providers is meeting the increasing demand for medical services in today’s high-cost environment,” said John Wilson, President of HSA PrimeCare.
Research from Colliers indicated that nationally, the medical office sector continues to boast low vacancy rates and record-setting asking rents. However, elevated construction costs and disruptions in the capital markets have led to a noticeable decline in sales volume.
“Some solutions include establishing joint ventures with other service providers, teaming up with real estate companies to build outpatient developments or finding alternative ways to capitalize projects,” said Wilson.
As an example, he shared that hospital systems, along with their developer partners, may need to bring more equity to the table in order to fund projects.
“It’s challenging to provide primary care and make money,” Wilson said, noting that hospital systems, on the other hand, offer a wide range of specialty services that help compensate for less-profitable offerings like primary care.
Despite its mostly promising outlook, the sector does face several challenges according to Colliers, including workforce deficits, supply chain issues and the complexities of coordinating post-acute care. Staffing shortages, exacerbated by low unemployment rates and the retirement of specialists, present significant obstacles. Additionally, rural healthcare access remains a critical issue, with many facilities consolidating or closing, forcing patients to travel long distances for care.
“Rising labor costs and static reimbursement rates made it difficult for Walmart and Walmart has announced it is closing its 51 health centers,” said Wilson. “Walgreens saw major losses on healthcare initiatives and is pulling out of the primary care market.”
Calling the health care real estate market “resilient,” Wilson credited that resiliency to the necessity of the services provided, many of them to an aging population.
“More procedures are being performed on an outpatient basis, driving demand for facilities outside of traditional hospitals and close to population centers,” Wilson said. “Once everybody gets comfortable with the economic reset that’s here to stay—that is, higher construction costs and interest rates that translate to higher rents—we’re going to see more and more development pencil out.”
Brian Edgerton, Senior Vice President of NAI Hiffman’s Healthcare Services Team, observed that healthcare and medical office development is necessary because the existing inventory of space within modern medical office buildings, particularly larger footprints, is not keeping pace with demand.
“This is because few, if any, facilities have been built on a speculative basis,” Edgerton explained. “In today’s capital-constrained market, developers often need a committed anchor tenant before breaking ground not only to obtain financing, but also because these facilities typically require a high level of customization for the end user.”
Edgerton pointed to multispecialty practices and large hospital systems, such as UChicago Medicine, Northwestern Medicine, Ann & Robert H. Lurie Children’s Hospital of Chicago and Rush University Medical Center, which have all have recently developed or are currently constructing new outpatient facilities in both the city and suburbs strategically located for their patients to have convenient access to care.
NAI Hiffman has played a crucial role in several key projects, including the expansion of Hummingbird Pediatrics. This provider has recently leased a new 10,000-square-foot location in Elmhurst, scheduled to open this summer. The facility, which includes a converted warehouse space-turned-gym, will offer a wide variety of speech, feeding, occupational, physical and developmental therapies, as well as counseling services and Hummingbird Children’s Academy, a therapeutic preschool for children ages 3-6.
“This marked the fourth time Hiffman represented Hummingbird in growing its footprint in suburban Chicago, where it has additional locations in Westmont and Woodridge,” Edgerton said. “With this latest location in Elmhurst, we found a single-story flex industrial building that could be retrofitted based on their specifications.”
In Oak Brook, Ill., NAI Hiffman is now the exclusive leasing agent for The York Health Center, a 2.5-acre build-to-suit opportunity that can accommodate a 35,000-square-foot medical office building.
“It benefits from high visibility and traffic counts, as well as nearby retail, restaurant and hospitality offerings,” said Edgerton. “As a result, the area has emerged as a significant medical corridor that already is home to Midwest Orthopaedics at RUSH and Endeavor Health Elmhurst Hospital.”
Additionally, NAI Hiffman facilitated the development of the Orland Park Medical Pavilion for Silver Cross Hospital and Premier Suburban Medical Group. NAI Hiffman Executive Vice President Perry Higa represented Silver Cross and PSMG in the build-to-suit development by negotiating the land purchase, bringing in Remedy Medical Properties as the project’s developer, Leopardo Construction as the general contractor, Jensen and Halstead as the architect and Kimley-Horn as civil engineer. Higa also negotiated the ground lease and long-term leases for both providers.
“This state-of-the-art, 42,000-square-foot facility features comprehensive lab, imaging, pharmacy services, a cancer care and infusion center and numerous exam rooms,” Edgerton said.
Silver Cross Medical Group has also leased 8,000 square feet at 410 Lincoln Highway in New Lenox, Ill., a Class A medical office building marketed by NAI Hiffman. The occupancy ready spaces were previously occupied by system-credit providers.
“We aim to build on this momentum as we look to fill the remaining 36,000 square feet with other providers that see value in quality second-generation medical office facilities,” said Edgerton, stressing that buildings like 410 Lincoln – quality, second-generation medical office space with good locations – will attract tenants and lease quickly. “There’s strong demand for such spaces because they offer tenants a path to rapid occupancy without burdening them with the expense and long-term lease commitment that usually accompanies a full renovation.”
That sentiment was echoed by HSA PrimeCare Executive Vice President Robert Titzer, who noted that due to higher interest rates and other challenges in the healthcare industry, some new development has hit a pause, which has led to increased attention on second-generation or existing spaces.
“This type of space provides benefits for both users and owners, which include more cost-effective buildouts, easier commitment with fluctuating interest rates and new revenue stream for property owners,” Titzer said.
Both Edgerton and Wilson mentioned the emergence of new trends and technologies within the sector, one being that behavioral health has become a critical area of focus, with growing demand for mental health services driving the development of new facilities. Additionally, AI tools are increasingly being incorporated into construction and site selection processes, promising to enhance efficiency and profitability. The integration of artificial intelligence is poised to revolutionize the healthcare sector as AI’s potential applications include streamlining administrative tasks, enhancing telemedicine platforms and aiding in medical imaging and personalized treatment plans. For example, predictive analytics could improve healthcare resource planning and allocation, making the sector more efficient and responsive to patient needs.
As Colliers’ research highlights, the healthcare industry is at a pivotal crossroads, with opportunities for growth and innovation on the horizon. The anticipated decline in interest rates is expected to stimulate investment and deal activity in the coming years. While the state of the medical and healthcare office sector in Illinois is one of dynamic growth and evolving challenges, one thing is clear: with strategic partnerships, technological innovation and a focus on meeting the needs of an aging population, the sector is well-positioned for a promising future.
