Digital Hospital Boosting Medical Office Rental Rates Citywide
“At this time, $23 per square foot feels like you’re getting a deal in medical office space. But three years ago, $20 was a great deal,” says Rich Campbell of Veritas Medical Real Estate. Prices for medical real estate began a steep rise this year in response to the physicians office building (POB) being built on the campus of Trinity hospital’s new location on Highway 280.
The new building, dubbed the Grandview Physicians Plaza, will include 207,500 square feet spread over eight floors. Right now, according to the developer, Daniel Corporation, about 68 percent is leased. But that may be low-balling it, because Trinity is anticipated to request more than the 103,000 square feet they have committed to so far.
The rental price at the Grandview runs $21 per square foot without operating costs. “We anticipate rental rates in the range of $30 to $32 per rentable square foot including operating expenses,” says Jim Adams with Daniel.
“Those two numbers are apples and oranges, and physicians have to know how to decipher it,” says Campbell. “A lot of doctors get out into real estate and hear the on-campus rate is $21 and another off-campus landlord says $23, and the doctor does not know that the $23 is all inclusive — operations, taxes, insurance — but the $21 on-campus rate is only a base rate.”
The actual costs to the physicians are not being hidden, stresses Campbell, it’s just that physicians need to be educated on shopping for office space. “There are nuances in every lease,” he says.
The rent at Grandview has spurred increases across the city. “It happened very quickly to buildings across from the hospital. They instantly raised their rates,” Campbell says. Before Grandview’s announcement, leases in that vicinity ran $21 to $23. “And they were pretty close to the hospital,” he says. “But now they’re $28 to $29 per square foot and they’ve not done anything extra to get that additional rental rate.”
In Homewood, about 15 minutes away from Grandview, practices can still get space in existing buildings for $22 to $23 per square foot, including operating expenses. “But those owners are now thinking of charging $25 to catch up with the market,” Campbell says. “I think the rise in medical rental prices is inevitable. On Highways 119 and 280, where it’s not more convenient to the digital hospital, it’s now $25 per square foot.”
Campbell doesn’t see any pattern to the trend of rising rents in the metro area. “I don’t think there is going to be a pattern,” he says. “It’s just landlords are going to be setting rents at the new norm of $25 to $30 per square foot.
“The developer of Grandview is not being greedy,” Campbell says. “The new building is just more expensive to run. It’s a nicer building, and there’s more to it, so it’s requiring a low $30’s rent to cover that.”
Adams says the culprit is rising construction costs. “Unfortunately construction costs go up and lease rates go up accordingly,” he says. “In many cases, the rent is more than physicians have been paying, but we tell them that if we could lease for less, we would because our objective is to get the building leased at 100 percent as soon as we can.”
Moving to a new building can create opportunities for ongoing savings not possible in other situations. “It offers efficiencies they might not have in the design of their existing spaces,” Adams says. “This is an opportunity to better arrange the flow of their office.”
Due to open October 10, Grandview Physicians Plaza will offer not only the convenience of being on Trinity’s new campus, but will sit atop its own parking structure. “If you are seeing a physician on the fifth floor, you will get on the elevator in the parking garage and go straight to that floor,” Adams says. “You don’t have to stop in the lobby and switch elevators. It’s just a straight shot.”
The moral of the story, says Campbell, is physicians with lower rents now — no matter if they are affiliated with Trinity or not — should be ready for a market-wide shift. “It’s beginning to happen now,” he says. “There are still good deals out there. But I think in 18 months, you will no longer be able to negotiate prices by saying you’ll just go somewhere with lower rents. I could be wrong. To some degree, I will be wrong, because landlords want doctors. But prices are rising.”