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The medical office market should continue on a slow and steady growth path.

Using the turtle and the hare metaphor, it is appropriate to associate Atlanta’s medical office market with the turtle and the metro area’s general office market with the hare. With a few exceptions, Atlanta’s medical office market has continued a slow and steady expansion during the last 30 years. While the size of the medical office market is substantially smaller than the general office market, it has not experienced the booms and busts that have plagued general office market over the same 30 year period. On-campus and Class A medical office buildings have consistently enjoyed 85 percent or greater occupancy.

The primary difference in the stability of the two segments of office space is that the demand for general office is driven by the state of the overall economy, while demand for medical office is driven more by the health and size of the general population. Metro Atlanta’s population has increased by more than 51 percent since 1990.

The last few years have seen slower growth in the medical office market primarily due to the unknowns of the Affordable Care Act law (Obama-care). Initially, there was uncertainty over whether the law would pass or not. After the law passed, then there was uncertainty whether the law would be repealed by the Supreme Court. Now that the law has made it through the Supreme Court, the medical office market is starting to expand at a more rapid pace. Politics aside, the healthcare reform law will be good for the medical office market. With more people covered by health insurance comes the need for more medical office space.

Atlanta’s central perimeter submarket contains the largest concentration of medical office space. Pill Hill, as it is known locally, is the area surrounding the three-hospital cluster of Northside Hospital, Saint Joseph’s Hospital and Children’s at Scottish Rite (a Children’s Healthcare of Atlanta hospital). There are 22 medical office buildings consisting of 2.5 million square feet. This medical office market is 85 percent leased at an average full-service rate of $24 per square foot. Northside Hospital recently purchased the three-building, 169,000-square-foot Northside Professional Center. This 1970’s era development was the first privately owned medical office development in the market and accounts for a large percentage of the current medical office vacancy. Northside hasn’t announced its long-term plans for this property.

The medical office market around Wellstar’s Kennestone Hospital is the second-largest concentration of medical office buildings in the metro area. With a little more than 740,000 square feet of medical office space in this submarket, there is a great disparity between new and old buildings. The newer buildings are mostly full and the older buildings have substantial vacancies. The submarket occupancy is 80 percent with an average full-service rate of $19.10 per square foot.

The Dekalb Medical Center and Emory-Johns Creek round out the third- and fourth-largest medical office submarkets around hospitals. The Dekalb Medical Center submarket consists of approximately 440,000 square feet of medical office space and is 91 percent occupied. The Johns Creek submarket contains approximately 400,000 square feet of medical office space, which is 70 percent occupied. Due to is proximity to Technology Park and over abundance of vacant general office space, this submarket has been affected by medical practices moving into nearby general office buildings. As the general office market starts to rebound you will see this phenomenon self-adjust.

As for development, Georgia Hand, Shoulder & Elbow is developing a 50,000-square-foot medical office building on Peachtree Road, across from Piedmont Hospital. The building is scheduled to be delivered in the first quarter of 2013 and is 100 percent leased. Northside Hospital is not renewing its 51,000-square-foot master lease at 100 Stone Forest Drive in Woodstock, but rather is developing its own 100,000-square-foot medical office building at the intersection of I-575 and Towne Lake Parkway.

Provided developers do not start too many new medical office buildings in the next year — and provided that the fear of healthcare reform subsides — the medical office market should continue on a slow and steady growth path. As with the turtle and the hare, slow and steady wins the race.

— Thomas Kirbo is president of Atlanta-based SK Commercial Realty.

Content Partners
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‣ Lee & Associates
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