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Medical Office Demand To Continue Strong As Healthcare Chases Rooftops

Maybe there is one trade-off for Metro Atlanta experiencing the worst flu season in almost a decade. Demand for medical office space is as strong as it has been in years.

Rendering of The Loudermilk Cos.' 371 East Paces Ferry medical office building project

A lack of new development, coupled with tenant expansions, has pushed vacancies in Atlanta below 10% for the first time in more than a decade, according to a recent report by Transwestern. More than 630K SF of medical office space was absorbed in 2017, including nearly 200K SF in the fourth quarter alone.

“This has given rise to healthy rent growth across the market, with asking rates now averaging $23.35/SF and some submarkets seeing rents as high as $29/SF on a triple-net basis,” Transwestern officials said in the report. “Even with development on the rise, most of that space is already spoken for, so the forecast calls for continuing rent growth and a vacancy rate that will continue ticking downward over the next 24 months.”

This growth in the medical market has occurred in spite of the ongoing uncertainty of the Affordable Care Act, which initially required that everyone have insurance. Instead, there are more mega-trends at play — an aging baby boomer population, which is retiring at a rate of 10,000 people a day, and millennials, who have already surpassed baby boomers in sheer population.

For healthcare providers, there also has been a concerted effort for them to move medical services closer to population clusters in Atlanta instead of expecting patients to drive to traditional medical nodes in places like Buckhead or Pill Hill in Central Perimeter.

“What we're really seeing is [healthcare providers] are getting out into the rooftops in these suburbs so they can be more accessible and more convenient for the patient,” Transwestern Senior Vice President Steve Hall said. “It's just all about the convenience.”

Historical graph of absorption versus vacancies in Atlanta's medical office market

More than 700K SF of medical office space was under construction at the start of 2018. But of that space, more than 60% was already pre-leased, according to the report. The bigger projects include 371 East Paces Ferry, a 120K SF upscale medical office building in Buckhead being developed by The Loudermilk Cos., and Northside Forsyth MOB V, a new medical office building for Northside Hospital in Forsyth County.

The list of new medical developments goes on, from Northside's new 170K SF medical office tower in Midtown to Children's Healthcare's new 70-acre facility off North Druid Hills Road just north of Downtown Atlanta, which includes a mid-rise tower called the Center for Advanced Pediatrics.

Transwestern Director of Research Keith Pierce

SK Commercial Realty President Tom Kirbo, a veteran in medical office leasing in Atlanta, said the demand has definitely been more focused on large healthcare systems rather than individual physician practices. Those numbers may be obscuring the fact that much of what is happening is simply medical systems shuffling doctors offices around from older properties.

“It's more robbing from Peter to pay Paul because the hospital is moving something,” Kirbo said.

Kirbo said he expects activity to pick up in Gwinnett County now that Northside Hospital officially closed on its purchase of Gwinnett Medical Center.

Transwestern Director of Research Keith Pierce does not expect the ongoing battles in Washington, D.C., to ultimately affect demand among healthcare companies for new space in the metro area.

“The vast majority of the people around the country are still getting their insurance through their employer. I don't want to be glib about it, but I think [uninsured patients] is a blip in terms of demand,” Pierce said. “It won't change the fact that they will require [healthcare].”