Market for medical office space grows healthier

High vacancy rates in office buildings continue to drag down lease rates and stifle new construction in Reno and Sparks, but one subsector of the office market is red hot.

Demand for medical office space, particularly in the Meadowood area, is becoming increasingly stronger, says Todd McKenzie, principal with McKenzie Properties. Reno-based McKenzie Properties plans to develop between 30,000 and 50,000 square feet of new space at Rancharrah off south Kietzke Lane beginning in 2015, and medical office definitely will be a component of the first phase of construction, McKenzie says.

“We are seeing an influx of medical requests, and we do not have any space to accommodate them,” he says. “There is a very limited supply of medical space available. If you want it you have to either build or convert existing office into medical, and that comes with parking issues and impact fees.”

McKenzie Properties also plans to develop additional medical office projects in the region in the next few years, McKenzie adds.

The Reno-Sparks market has roughly 2.87 million square feet of medical office space under roof, says Melissa Molyneaux, vice president of the office properties group at Colliers International. The overall vacancy rate for all office properties in the region stands at 17.4 percent, but it’s 4 percent lower in the Meadowood submarket and lower still among medical office properties.

Jamie Krahne, northern Nevada regional manager for Ensemble Real Estate Solutions of Phoenix, manages a 3.2-million-square-foot portfolio of medical and office space in Nevada. Absorption in northern Nevada for the year is tracking 15 percent higher year-over-year, Krahne says, and it was up 6 percent in 2013. The regional economic recovery also has healthcare organizations and medical providers executing longer-term leases at higher rates than in past years, Krahne adds.

Vacancy rates are higher for medical office properties surrounding the Renown Regional Medical Center and Saint Mary’s Regional Medical Center campuses, brokers and developers say, but some of that space has become dated and isn’t as attractive to physician group practices or sole medical practitioners.

“We still have a lot of medical space, but it’s the same with regular office — you have to look at class, quality and amenities,” Molyneaux says. “At some point some medical space becomes obsolete.”

The medical community has long targeted the Meadowood/South Kietzke Lane area to house growing group practices. For the most part, McKenzie says, physicians and other medical professionals prefer to lease new or newer Class A office space.

The Meadowood trade area became a hub for medical office users due its centralized location and natural attraction between existing physicians’ groups.

“Like users tend to group together,” McKenzie says.

Although properties such as Quail Corners and Quail Park South off Sierra Rose Drive and South McCarran Boulevard in Reno were constructed beginning in the early 1990s, buildings in the two office parks still show well and remain attractive to medical tenants, Molyneaux adds. The same is true for much of the newer Class A space off in South Meadows developed by Tanamera Construction. Molyneaux says the area has become the second-most popular medical office park among all newer medical office buildings. Medical users are attracted to the area because they can get nicer space with newer technologies and more efficient layouts for their medical practices.

“Doctors want to be where other medical users are, and they want to be in a newer location,” Molyneaux says. “It’s easier to have a clean slate versus taking what someone else has done and demo-ing it out.”

Despite the increased demand, construction of new medical office space still lags. The last development in the Reno-Sparks market was two small shells constructed off south Kietzke Lane by Pinecrest Construction and Development.

Krahne says increased access to healthcare and job growth in the region will spur additional demand for medical office space. There will be shifts in size and location as well, she adds, as healthcare groups entrench themselves in neighborhood retail and office centers to increase convenience for customers.

“Gone are the days where a patient must travel to a hospital campus for imaging services; you are now seeing these services being offered in neighborhood commercial centers and other non-traditional medical office space options,” Krahne says. “There also is a tremendous amount of redevelopment taking place in the area, and we expect this trend to spill over into medical office as groups look for the most cost-effective solution to provide value and efficiency.”