The Twin Cities medical office building market has seen quite a lot of construction activity in the past two years, highlighted by projects such as the new Hazelwood Medical Building, adjacent to the St. John's Hospital campus in Maplewood.
The 140,000-square-foot multitenant structure, which opened last fall, is an illustration of several trends that have been ongoing in the "MOB" market. For instance, although built and owned by Minneapolis-based Davis Real Estate Group, it's anchored by St. John's owner HealthEast Care System and so is considered part of a decadelong surge of "on-campus" new-construction activity by health care providers.
It's also an example of how those providers are looking closely at how to consolidate their on-campus real estate for efficiency's sake and to reduce costs. In this case, HealthEast brought together an array of uses once scattered across the St. John's campus into a single location loaded with the latest "patient-friendly" amenities.
But the Hazelwood Building is also turning out to be illustrative of another trend as 2018 progresses: the overall strength and fundamental stability of the Twin Cities medical real estate market. Despite its addition to the metro's 3.1 million-square-foot MOB universe — as well as more than 700,000 additional square feet of new on- and off-campus buildings coming online as 2018 began — demand, vacancies and lease rates all remain at healthy levels, according to its developer.
"Looking at what's been going on since last fall, what's really interesting is that while industry watchers were thinking the market might go down because of all the new construction that has happened in the last 18 to 24 months, that just hasn't happened," said Jill Rasmussen, a Davis Group principal and health care real estate broker.
"In fact," she added, "we actually think now that we might see even more new construction in 2018 than we did in 2017."
Rasmussen said the robust market fundamentals "haven't seen a lot of big changes" over the past six months despite the building spree, with average lease rates actually increasing slightly and very little change in vacancies, which were averaging around 8.4 percent for on-campus properties and 11 percent for off-campus offices last fall.
The level of recent medical office construction both on- and off-campus has indeed been impressive. In addition to the Maplewood facility, the list includes Hennepin County Medical Center's 377,000-square-foot, built-to-suit ambulatory care center opening this month at its downtown Minneapolis campus; Davis Group's multitenant City Place Medical Building in Woodbury; as well as several new clinics from Tria Orthopaedics and Twin Cities Orthopedics.
Meanwhile, there are still "a couple of large projects" that will keep construction crews busy this year, Rasmussen said.
But what's getting built is changing. Davis Group principal Mark Davis said the long-standing boom in on-campus development, sparked by multiple rounds of acquisitions and consolidations among primary care providers, is likely over, with those providers now moving into a phase of re-evaluating and retrofitting their existing campus footprints.
"With the merger of Fairview and HealthEast last year, there really aren't any more consolidation options left in our market, and that will be changing the focus of where the demand for space is coming from," he said.
Instead, he predicted the emphasis in new construction and development will move to off-campus multitenant space targeted toward small and midsize users.
"We're actually pursuing a couple of new multitenant development opportunities now, and I think there's going to continue to be an appetite for that among smaller users who aren't part of a big health care system," Davis said. "There are still a lot of medical users out there who believe it's beneficial to be in a synergistic center like that where there's a lot of activity."
Don Jacobson is a freelance writer based in St. Paul. He is the former editor of the Minneapolis-St. Paul Real Estate Journal.