Spec Suites Turning Into Favorite Tool For Chicago Medical Office Developers
While speculative development has lost popularity in Chicago’s industrial and office sectors, ready-made space is gaining steam in the city’s medical office sector.
Spec suites are becoming key to Chicago’s MOB market, leasing faster than shell space as some healthcare providers demand space they can occupy within weeks, panelists said at Bisnow’s Chicago Healthcare Summit, held at 566 W. Lake St. That push coincides with outpatient visits projected to grow 18% in the next decade, as inpatient visits are estimated to only go up 5%.
“When you’re buying a building and the game is leasing it up as fast as you can, having spec suites there and ready is crucial to our plan,” said Jon Boyajian, principal at Echo Real Estate Capital.
The medical office sector is poised for growth in the coming years.
Over the next five years, the U.S. population aged 65 or older will grow by about 7 million people, fueling 23 million additional doctor visits annually. That is expected to reduce medical office vacancy and boost rent growth, according to a Marcus & Millichap report.
Nationally, the average MOB vacancy rate rose by 3 basis points quarter-over-quarter and 41 bps year-over-year to 9.9% due to construction deliveries outpacing absorption for four consecutive quarters, according to a second-quarter CBRE medical office report.
Many providers are rapidly scaling up and don’t have the luxury of waiting months for a custom suite, Boyajian said.
“A lot of doctors don't give themselves six, eight, 10 months to go find a space and negotiate,” Boyajian said. “They need something in 30 days. So if you have something that's available, ready to move in, it's just going to lease faster.”
His firm has secured tenants for suites before construction was even complete, with lenders supporting the approach, he said. Landlords typically cover the bulk of build-out costs, with tenants reimbursing a portion to keep rents manageable.
Ventas Senior Vice President Brian Fry said his company has seen “great success” this year investing in spec suites across the country. The initial cost to build them out can be a bit pricey, he said, but the markets with strong hospital systems have led to good leasing traction and velocity.
“They're getting snatched up, and we're going quick on deals too,” Fry said. “It's been a really great add-on opportunity for us this year.”
Chicago’s healthcare landscape has no dominant player, with no system holding more than 20% market share, Fry said. That makes the market hypercompetitive as health systems jockey for position.
Fry added that property taxes in the city are also far higher than in other metros, driving up operating expenses and putting pressure on rents.
Even so, he said the ambitions of local systems are fueling rapid growth, particularly in specialty care. Advocate Health Care announced a $1B investment on the city’s South Side at the end of 2024, a sign of the significant capital still flowing into the market.
The Chicago market also features an interesting wrinkle in that its proximity to the western portion of Indiana means that many of the city’s top medical systems also have surgery centers in the neighboring state. Munster, Indiana, is a particularly hot spot.
“They can almost make double the money and have half the expenses to do surgeries there,” said Jack Gavin, executive vice president of investments at Remedy Medical Properties.
Health systems are also pushing to keep core services like primary care, labs and physical therapy under one roof, Gavin said. By housing services in the same ecosystem, providers can avoid fragmented records, strengthen patient loyalty and ensure referrals stay in-house.
That model is expanding to include urgent care, imaging and multispecialty practices, with layouts flexible enough to host different specialties throughout the week, Gavin said.
“That's all intertwined as far as where we see the expansion going, and all those services definitely being under one roof is going to be crucial,” Gavin said.
