The diagnosis: Medical office market healthier than ever across Midwest

The medical office market remains a hot one throughout the Midwest, with several major cities seeing demand for this space soar. And according to the latest research from CBRE, this trend doesn’t look to be ending soon.

Consider the Midwest city of Louisville. CBRE’s 2019 U.S. Medical Office Trends report says that since 2010, Louisville has recorded 479,000 square feet of positive net absorption of medical office building space.

And Louisville’s medical office market shows no signs of slowing. CBRE reports that during the year ending in the second quarter of 2019, the Louisville market recorded 62,000 square feet of positive net absorption.

The other fundamentals of this sector are strong, too. The vacancy rate in Louisville’s medical office market are down to 3.5 percent, while asking rates increased 3.7 percent on a year-over-year basis to $19.80 a square foot.

Demand should remain high, too. CBRE says that the market currently has just 25,000 square feet of product under construction.

“Medical office continues to be an active market in Louisville,” said David Williams, senior vice president with CBRE in Louisville. “With vacancy extremely tight, we will likely see rental rates continue to rise and potentially more new construction in the future.”

The entire Midwest has been strong in this sector, according to CBRE. The company’s report cited four Midwest markets – Chicago, Cleveland, Columbus and Cincinnati – as being among the country’s top 10 for highest net absorption as a percentage of inventory. Chicago led the country with 915,000 square feet of net absorption during the year ending in the second quarter of 2019. Since 2010, Chicago’s medical office market has seen 1.96 million square feet of net absorption.

The numbers are impressive in Columbus, too. CBRE reports that since 2010, this market has seen an impressive 2.04 million square feet of absorption. In Cleveland, that number is 752,000 square feet.

Cincinnati has seen more than 1.59 million square feet of net absorption since 2010, while Detroit has seen more than 2.9 million square feet and Minneapolis more than 2.38 million square feet. The Kansas City market has seen net absorption of 697,000 square feet of medical office space since 2010.

Transaction volume for medical office buildings stands 50 percent higher this year than before the recession, though it has receded from its early-2018 peak. Foreign investors, domestic institutions and real estate investment trusts are steadily getting more active the medical office market. Cap rates – a measure of a property’s income as a percentage of its price – for medical offices have pulled even with those of conventional offices after years of registering higher.

“There is a continued rush by capital to this property sector,” said Ian Anderson, CBRE Head of Americas Office Research. “This is a generational, secular trend driving interest in this type of real estate. The median age of the American population is gradually increasing, and health care as an industry is moving more toward treatment at outpatient centers and medical offices than at hospitals.”