Vacancy rates remain at record levels. After averaging below 10 percent for much of the 1990’s and 14 percent through 2007, rapid expansion and negative absorption pushed the overall vacancy rates to 18.7 percent in second quarter of 2010. (This revised vacancy rate has been adjusted down .3 percentage points from previous reporting). Positive leasing activity dropped the vacancy rate to 18.1 percent at year end 2010 however the effects of lagging national economy on health care real estate has pushed vacancy rates back to 18.7 percent at midyear 2011. The effect of sublease space would increase vacancy rates by approximately .5 percentage points- however much of this space is occupied and can be difficult to retrofit and thus are not factored in our averages. The highest vacancy rates are in the Central Perimeter (23.1 percent) and the North Fulton (24.1 percent) submarkets -the lowest in the Northlake (9.9 percent) submarket. Even with these extended vacancy levels, with limited future deliveries and ongoing active we anticipate vacancy rates will decline to 18 percent in 2012.
Large medical office buildings provide a great source of inter-office referrals, a wealth of amenities, purpose-built mechanical systems and professional property management and ownership that understand the challenges facing healthcare providers. There are currently 56 MOBs greater 80,000 square feet with a combined vacancy of 14.5 percent. Of these, 32 have space available of at least 5,000 square feet. What is interesting and important to note is that these MOBs have a combined vacancy rate of over 26 percent -several having vacancy rates in excess of 40 percent -and a total of 1.176 million vacant square feet. The remaining MOBs with less than 5,000 square feet for lease have a combined vacancy rate of less than 1 percent. Having up to date market knowledge is vital in negotiating the best lease terms and conditions.
Absorption –the net deference in the amount of occupied space -turned negative in the past two quarters. Last year’s positive absorption of over 101,000 square feet was nearly offset completely by negative absorption in 2011. Many physicians had taken advantage of favorable market conditions, lowered quoted rental rates and market incentives in 2010, however; absorption was negative -92,000 through second quarter 2011. The three largest markets with occupancy losses were South Atlanta at -39,310 square feet; Central Perimeter at -35,603 square feet; and North Fulton at –22,168 square feet. One positive was the Northeast Atlanta submarket with occupancy gains of 22,998 square feet. We anticipate increasing incentives and ongoing inquires among sub specialties along with limited deliveries to create positive absorption by year-end and into 2012.
Average quoted rental rates and effective rental rates continue to decline. Quoted rental rates in the first half of 2011 averaged $20.49 per square foot, are down by $1.00 per square foot from 2010. MOBs located in larger markets and around major medical hospitals remain the highest including North Fulton ($22.25 per square foot) and Central Perimeter ($22.22 per square foot). Newer class A, on-campus medical office buildings demand a premium rental rate often several dollars above the market average. Effective rental rates factoring free rent, reduced escalations and improvement allowances are declining further often 10 percent to 20 percent below quoted rates. Furthermore, rental rates can vary widely based on building quality, location, amenity base, access and tenant mix. Pay close attention as some properties quote rental rates on a full-service basis, which includes operating expenses. Others quote rates net of expenses where the tenant pays separately for utilities, janitorial, taxes, building insurance, and common area maintenance (TICAM), which can add $7.00 to $9.00 per square foot to the lease rate. Be mindful to compare like kind quoted rates. Before rents stabilize over the next several quarters, we anticipate further declines in both quoted and effective rent rates through free rent and creative concessions.
Recent, notable leases include: Atlanta Nephrology Referral Center (2,745 SF, Gwinnett Medical Building, Lawrenceville, GA); The Radiology Group (2,475 SF, Teron Trace, Dacula, GA); Eye Consultants of Atlanta (6,556 SF, Gwinnett Professional Building); and Pediatria Healthcare (12,000 SF, Lakeside Parkway, Tucker, GA) among others.
For a complete report of supporting data and/or request for a market study for areas not yet reported on this blog, please give us a call or email Richard Smith, CCIM. We can also provide full market research studies including available spaces, lease rates, operating expenses, sales comparables and tenant rosters on medical office buildings across the Southeast Region. We work with health care professionals evaluating real estate options.
