Valley medical office market continues slide

Leila Navidi

Late-night care: Pediatrician Dr. Sandy Kalm, left, waits for patients Feb. 15 with medical assistant Holly Crofton at the newly opened Good Night Pediatrics in Henderson. The practice is open from 5 p.m. until 5 a.m. every day of the year.

By Buck Wargo

Fri, Feb 19, 2010 (3 a.m.)

The Southern Nevada medical-office market has been hurt by the recession and the shortage of medical professionals, analysts said.

The average vacancy rate was 17 percent at the end of 2009, a slight increase from the third quarter when the rate was 16.57 percent. The vacancy rate was 15.45 percent at the end of 2008.

Bruce Follmer, an analyst with brokerage CB Richard Ellis, said, “What is going on, it seems, is a lot of existing tenants are taking advantage of the market and moving from one place to another. They may go from one 3,000-square-foot building to another, so there is no net absorption.”

Most buildings with “decent medical office space” are able to keep tenants, Follmer said. Buildings that are older and have deferred maintenance have had tenants move out.

Follmer said he expects the vacancy rate to remain close to 17 percent over the next year. That is much better than the office market as a whole, which is approaching 25 percent vacancy.

The medical-office sector is doing better than the office market because the community is underserved with medical services, which means greater demand for space, Follmer said. Also, doctors are a stable group, who aren’t as vulnerable to the economy as other professions, he said.

“People still need services even when times are tough,” Follmer said. “We are dealing with an ophthalmology group. Instead of doing a whole bunch of laser surgeries, they are selling more glasses and contacts.”

In the office sector, many financial companies, title companies and homebuilders have gone out of business and with so many buildings constructed on speculation, there is more supply than demand, Follmer said.

Despite the health care industry being the one sector that is adding jobs, Follmer said there are some problems.

Many medical practices are waiting to see what rules are set in Washington for health care reform before expanding, he said.

“Health care reform is keeping them from jumping out and doing a lot of expansion. It is an unknown to them right now, but once they figure it out, they will be able to make decisions,” Follmer said.

Meanwhile, brokerage Commerce CRG reported the vacancy rate at 14.1 percent at the end of 2009. David Afromsky, director of corporate services, said doctors are looking for deals just like other tenants.

Some doctors have partnered with others because they are feeling the recession’s effects. Insurers want to pay doctors less, and there is a domino effect on landlords because the physicians want better deals, he said.

The highest vacancy rate is in the southwest valley at 35 percent. The lowest is in North Las Vegas at 0.06 percent, according to CB Richard Ellis.

The southwest valley has fared poorly because too much space was built, especially near hospitals in anticipation of population growth spurring the demand for medical services, Follmer said. That growth has slowed because of the recession, he said.

The low vacancy rate in North Las Vegas is because of a limited amount of space, Follmer said. Many developers have put medical-office projects on hold, which has helped the vacancy rate, he said.

The average lease rates for medical space increased slightly to $1.79 per square foot per month by the end of 2009, up 2 cents since the third quarter. The asking rates are below the average asking rates of $2.37 at the end of 2008, CB Richard Ellis reported.

It’s a tenants’ market because in addition to bargain lease rates, landlords are offering increased improvement allowances and free space to attract and retain tenants.

Follmer said developers are trying to keep the lease rates as high as possible. It is important to keep lease rates up so they can retain the value of their buildings, he said.

“The (effective rents) are 50 to 75 percent of what they once were,” Follmer said. “It has been tough on everyone.”

In terms of investment, activity has been minimal in the medical-office sector, according to CB Richard Ellis.