Medical office space overdose?

Nearly 600,000 square feet of new medical office space is becoming available in the Colorado Springs market this year. Some is committed to tenants who plan to move into the buildings, but a large chunk is not.

The medical office sector is already lethargic, according to industry reports, with higher-than-normal vacancies and modest declines in rents in the first quarter of this year.

The situation has some real estate professionals wondering whether the market is becoming oversaturated; others say they're not concerned because developers are wisely planning for an aging and increasing population.

"The fact is that there are only so many physicians in town. The bottom line is that some of these new buildings will do well and some won't," said Ted Link, principle owner of Cascade Commercial Group, who has been leasing medical offices here since 1986.

The new space joins 3.24 million square feet of existing medical office space, which saw an average vacancy rate of 8.1 percent in the first quarter of this year, according to Turner Commercial Research, up from a 7.3 percent medical-office vacancy rate in December.

"At the present time, there appears to be an abundance of medical space available - half a million square feet," said Paul Turner, who produces the Commercial Availability Report, a quarterly look at Colorado Springs market conditions.

Much of the new office space is in the northeast quadrant of the city, an area burgeoning with residential and retail growth. The development also follows another trend: Medical office buildings are springing up near new hospitals.

"Proximity to hospitals is very advantageous for certain types of practices, and physicians want to be on or near hospital campuses," said Tom Hulme, vice president of development for Health Care Property Investors Inc. The public company is the largest owner of medical office buildings in the nation.

The company's medical office properties division, based in Nashville, developed Medical Office Building One, which had its grand opening in April on the campus of Memorial Hospital North.

The building is 75 percent leased, Hulme said, with space going for $18.50 to $19.50 a square foot, plus operating expenses, such as utilities and maintenance.

Memorial Health System helped recruit Building One tenants, including The Children's Eye Center, the Briargate Endoscopy Center and Gastroenterology Associates of Colorado Springs, said Steve Schaefer, vice president of development for the city-owned hospital system.

"We're excited about all the medical office buildings in close proximity - it will help get needed specialties to the north end of town," Schaefer said.

Beth Kobylarz, office manager for Associates in General and Vascular Surgery, said the group's seven doctors saw a need to open an office near Memorial Hospital North. The group also has an office at Memorial Hospital Central, east of downtown.

"They're able to take calls to service patients they've seen at the hospital," she said. "It just made sense, and patients are given a choice to go to whichever of our two offices they live closest to."

Another project claiming success is NorthCare at St. Francis, which will open the first week of August on the campus of the new St. Francis Medical Center.

The $15 million office building is 85 percent leased, said Jim Zorman, majority partner at The London Real Estate Group in Colorado Springs, which is leasing the property. He expects 100 percent occupancy by the end of the year.

Zorman attributes the high interest to two features: The building is attached to the new hospital via a sky bridge, accessed from the hospital's fourth floor, and it has a physician-owned business model.

The building owner, NorthCare at St. Francis LLC, is a local investment group of about 30 physicians, who purchased units, or shares, in the building. Those physicians will have their offices in the building and will receive monthly distributions from lease payments from the 20 percent of tenants who aren't owners. The tenants will pay $19 a square foot plus expenses.

"It wasn't a hard sell," Zorman said. "All the physicians have associations with Penrose-St. Francis, and with Penrose Community shutting down when this medical center opens, they had the foresight to know additional space was needed at this busy intersection."

Eye on the future

While the medical community appears to be embracing the new buildings on hospital campuses, other medical office buildings are feeling the effects of a softening market.

The Medical Pavilion at Briargate, across from Memorial Hospital North, will open in July and has no signed leases, said Gerilyn McGaughran, leasing director for HealthCare Realty Trust, a Nashvillebased public company.

But she said she's negotiating with potential tenants for about 50,000 of the available 170,000 square feet.

"We're planning for the future," McGaughran said. "Anyone in this market at this time needs to have a long-term perspective because ultimately, you will see a migration to the north with additional doctors' practices."

Link's Cascade Commercial Group also is having a tough time leasing a building slated to open today in Kissing Camels Office Park. It's near Fillmore Street and Centennial Boulevard, where another medical cluster - including a rehab center, an osteopathic clinic and, eventually, the headquarters for the city's largest physicians' group - is located.

"I'm not going to lie - it's been a little slow," Link said. "In my opinion, we're overbuilding, especially in the north part of town."

A trio of 32,600-squarefoot office buildings that will begin opening in August at the corner of Powers Boulevard and Briargate Parkway also has several tenant prospects but no signed leases, said Mary Frances Cowan, a broker with Grubb & Ellis|Quantum Commercial Group.

"There's a lot of competition among several properties for the same users," she said. "There's more supply than demand now, but the projections show we are going to see a definite migration to the north of physicians, largely because of the new hospitals."

Mark Dyer, also with Grubb & Ellis|Quantum Commercial Group, has one tenant - a dentist's office - in The Promontory at Briargate Business Campus, a trio of medical and general office condominiums that became available in November.

Dyer, a 23-year veteran of the Colorado Springs market, said he's not concerned about the large amount of new medical office space because the market is nothing like the severe overbuilding that occurred in the 1980s and 1990s, when government incentives spurred growth.

"We're a little ahead of the game now, but the data show tremendous future need, with demand that will probably outweigh the existing space," he said. "With building costs increasing significantly, developers aren't going to build unless they perceive a demand."

The new buildings also are expected to leave vacant chunks of space in older medical office complexes, some of which were remodeled from regular office space into medical office use when the city had a shortage several decades ago.

"People aren't leaving the older buildings just for the sake of moving north - those buildings are antiquated, have low parking ratios and functional obsolesces," Link said. "The new buildings are fairly competitive in price and have good amenities."

Link speculates that some of the newer medical office buildings could begin marketing to the general office segment if they don't attract enough medical tenants.

CONTACT THE WRITER: 636-0235 or debbie.kelley@gazette.com