Leasing Landscape Archives | Davis

Category: Leasing Landscape

Unlocking Value in Medical Real Estate: Our Expert Services

At Davis, we specialize in creating and implementing asset strategy plans for medical building owners and investors. Our comprehensive approach combines creative marketing, strategic lease-up initiatives, and deep market knowledge to maximize asset value. Here’s how we’ve helped our clients achieve exceptional results:

Strategic Site Selection and Development

Our team excels at identifying prime locations for medical outpatient buildings (MOBs) and healthcare facilities. We’ve successfully:

  • Researched markets to secure premier sites for new construction, such as the 44,000 sq ft Maple Grove Specialty Center and the 78,000 sq ft Xchange Medical Building in St. Louis Park.
  • Assembled multiple parcels in mature markets, like the 63,500 sq ft Minnetonka Medical Center, creating a valuable and strategic expansion opportunity for North Memorial.
  • Targeted specific locations to meet client needs, such as the 12,000 sq ft Rosemount Professional Building for Lorenz Family Clinic.

Anchor Tenant Acquisition

We understand the importance of securing anchor tenants to kick-start developments:

  • Pre-leased 20,000 sq ft to Minnesota Gastroenterology (MNGI) for CityPlace Medical in Woodbury, enabling construction to begin for MNGI’s schedule and allowing for a larger building to reduce occupancy costs.
  • Secured Allina Health Surgery for a 40,000 sq ft Class A MOB in Brooklyn Park, marking their first ASC with SCA in northern markets.
  • Partnered with Midwest ENT to create a joint venture ownership structure for freestanding buildings in Vadnais Heights, Woodbury and Lakeville.

Rapid Lease-Up and Full Occupancy

Our creative marketing and leasing strategies consistently deliver impressive results:

  • Achieved 100% occupancy for the 78,000 sq ft Xchange Medical prior to construction completion.
  • Expanded two medical building developments during construction due to substantial tenant demand in MHealth Fairview Clinics & Specialty Center and Lakeville Specialty Center.
  • Leased 90% of the 35,000 sq ft Savage Medical Building prior to construction completion, reaching 100% occupancy within the first 12 months.

Value Creation through Strategic Leasing

We excel at repositioning existing assets to maximize value:

  • Converted a 55,000 sq ft office building at 7450 France Avenue to a 100% medical building with eight long-term tenants.
  • Completed seven new leases at or above market rate for the 55,000 sq ft Wolfe Lake Professional Center.
  • Maintained 98%+ occupancy over a 10-year period for the 43,404 sq ft Gardenview Medical Building on the United and Children’s Hospital Campus.
  • Purchased a vacant 13,000 sq ft clinic building and expanded to and fully leased 30,000 sq ft.

Portfolio Optimization and High-Value Sales

Our strategies often result in profitable exits for our clients:

  • Sold the New Albany Medical Center in Ohio at the top of the market to a medical REIT after acquiring the asset and completing three new leases and constructing a skyway from the building to the Hospital for ease of access for patients and staff.
  • At the Unity Professional Building, Davis was able to coordinate and effectively manage a large tenant expansion lease and relocate, renew and expand three other tenants within the building to increase occupancy and building value. Our client was able to sell the fully leased asset to a local investor at an above market price. 
  • Davis purchased a 55,000 sq ft medical outpatient building from The Urology Group in Ohio, giving them the opportunity to monetize the asset and reinvest into their practice’s provision of premier patient care.

At Davis, we combine our deep understanding of the healthcare real estate market with innovative strategies to create substantial asset value for our clients. Whether you’re developing a new medical facility, repositioning an existing asset, or looking to optimize your healthcare real estate portfolio, our team has the expertise and track record to help you achieve your goals.

 

Integrating Medical Clinics into Non-Traditional Spaces

Addressing challenges and leveraging benefits through Noran Neurology’s successful transformation of an office building space into a specialty clinic.

Leasing non-medical buildings for medical clinic use has been driven by a blend of economic, logistical, and patient-centered considerations. Healthcare providers have turned to retail and office spaces to establish clinics due to prime locations, accessibility, and possible cost advantages, but it’s generally due to a lack of available outpatient medical building options in a market area.

Healthcare providers continue to be driven by the quest for patient convenience. High foot traffic, prominent signage, ample parking, and proximity to residential areas are highly sought-after attributes that many retail and some office building locations offer. However, these spaces present a unique set of challenges and opportunities for healthcare facilities.

 

An illustrative example is Noran Neurology’s 22,000 square foot clinic, leasing 22,000 square feet in the France Place office building in Bloomington. After conducting extensive analysis, including reviewing patient demographics and patterns, it was concluded that consolidating services from multiple locations into a single, well-located facility was the best solution.

Located prominently on France Avenue, the space offers ample parking, superior signage opportunities, and enhanced visibility—essential features that made it a cost-effective alternative to new construction. Additionally, the lack of suitable land for new outpatient medical buildings in the area made the existing office building a viable option.

The transformation of the office space into a functional medical clinic presented several challenges, including significant renovations that involved the removal of steel beams and exterior adjustments to accommodate medical equipment like the MRI. Essential infrastructure upgrades were necessary, such as enhancing water capacity, installing the appropriate signage, and improving wayfinding to ensure operational efficiencies. Properly addressing zoning issues was also crucial, as the space had to be adapted to meet all required health and safety regulations and standards.

The success of Noran Neurology’s new clinic hinged on the collaborative efforts of Davis, and our project partners. Together, our comprehensive understanding of outpatient clinic needs ensured that the project was completed on time and within budget, resulting in significant economic savings and enhanced patient access.

While integrating medical clinics into non-traditional spaces like office buildings or retail locations can be a viable alternative when other medical outpatient buildings are unavailable or affordable land for new construction is scarce, it’s not without challenges. This approach should only be considered if these locations are well-situated and meet specific criteria. The success of Noran Neurology demonstrates that with meticulous research, careful planning, and a strategic investment in infrastructure, clinics can thrive even in non-medical buildings. This method, though not ideal, can be made workable by addressing potential issues, ultimately reducing costs and enhancing patient convenience and access, thus meeting the evolving needs of patients and providers. 

 

The Most Successful Negotiation is One That Crosses the Finish Line

When it comes to commercial real estate, artful negotiation is the cornerstone of success. Whether you’re a seasoned owner or just starting out, the ability to navigate a negotiation can make or break a deal. Here are some key considerations and strategies that can help to get your transaction across the finish line:

Don’t Do It Alone

In complex commercial real estate transactions, particularly in the healthcare space, it’s wise to seek advice from experienced professionals such as real estate brokers, attorneys or financial advisors. Healthcare deals are often expensive long-term commitments. The guidance of the right qualified advisors who live in the healthcare real estate world day in and day out can provide valuable insights, mitigate risks, and ensure that your interests are expertly represented throughout the negotiation process.

Do Your Homework
Knowledge is power in negotiation. Before entering into any negotiation, thoroughly research the property, comparables, the other party and their motivations. Having a deep understanding of the overall context and underlying factors of the deal will give you leverage and confidence during discussions. Your advisory team can help you access and process this information.

Set Clear Objectives

Define your goals and priorities before initiating negotiations. Determine your desired outcome; including price, terms and any contingencies. Having clarity on what you want to achieve will guide your negotiation strategy and help you stay focused during discussions.

Build Rapport

Establishing a positive relationship with the other party and/or your client is essential for successful negotiations. Be respectful, empathetic, and professional in your interactions, even when things get tense or drag on way longer than they seem they should. Communicate consistently and follow through with building rapport to create trust and foster open communication, so it’s easier to find mutually beneficial solutions.

Listen Actively

Effective negotiation is not just about making your case; it’s also about understanding the other party’s perspective. Practice active listening to comprehend their needs, concerns, and objectives. By demonstrating empathy and understanding, you can tailor your proposals to address their interests while advancing your own agenda.

Look for Win-Win Solutions

Strive for outcomes that benefit both parties involved. Instead of viewing negotiation as a zero-sum game where one side wins at the expense of the other, aim to identify opportunities for mutual gain. Collaborative approaches often lead to more sustainable agreements and long-term relationships.

Don’t be Surprised by Compromise

Negotiation inevitably involves give and take. Identify areas where you’re willing to be flexible while prioritizing your non-negotiables. By showing a willingness to compromise on certain aspects, you can encourage reciprocity from the other party and more quickly facilitate progress toward a mutually acceptable agreement.

Document Agreements in Writing

Once an agreement is reached, document the terms in writing to avoid misunderstandings or disputes later on. A well-drafted contract should clearly outline the rights, obligations, and responsibilities of each party, providing a solid foundation for the transaction. We always recommend using an attorney with relevant experience to draft any legally binding documents.

Here at Davis, we proudly employ these strategies. In combination with our unparalleled healthcare real estate expertise, our team completes +/- 100 transactions annually, and would be honored to help you with yours.

Ambulatory Surgery Centers: Elevating Care with a Focus on Convenience and Quality

Collaborating with developers to manage costs and potential delays, providers are increasingly opting for long-term leases to avoid significant capital investment. In this article we will explore the financial aspects, including rental rates, build-out allowances, and operating expenses, while emphasizing the current challenges and future trends.

We’re amid a significant shift in the healthcare landscape, driven by demographic changes, the necessity of cost control, and the relentless pursuit of improved patient and staff experience. This is fundamentally changing the way healthcare is delivered, and the leasing market is evolving in step with this shift. As a result, we are witnessing a significant transformation in the landscape of healthcare real estate, with the leasing of ambulatory care clinics and surgery centers playing a critical role in this change.

Providers, in their pursuit of optimizing patient care, are forging partnerships with developers to reduce cost burdens and improve proximity to their patient base. By opting to lease, healthcare providers can conserve capital for other essential operational and medical needs. Instead of tying up capital in real estate, providers can invest in areas such as advanced medical equipment, cutting-edge technology, or specialized staff—resources that directly contribute to the provision of superior patient care.

A prime demonstration of this trend is the Lakeville Specialty Center, a collaboration between Davis, Allina Health, Allina Health Surgery, and MNGI Digestive Health. Lakeville is a fast-growing market and these providers implemented strategic plans to enter Lakeville and provide quality specialty care along with day surgery services. The strategically located 100,500-square-foot facility which houses two ambulatory surgery centers (ASCs) and opened in January 2024, was established under long-term leasing agreements that enabled these healthcare providers to expand their services without a significant strain on their financial resources.

Other successful surgery center projects we have completed recently that support this trend include Surgical Specialty Center of Minnesota at Xchange Medical in St. Louis Park, Allina Health Surgery at Helene Houle Medical Center in Vadnais Heights, MNGI Digestive at Maple Grove Specialty Center, Allina Health Surgery and Orthopedics at 610 Medical in Brooklyn Park and Midwest Surgery Center at Eagan Specialty Center.

Long-term leases spanning 10 to 20 years are now the norm, as they reflect the substantial time and financial investment required to build out new specialty care space (often upwards of $160/sf for clinic space, and $300/sf for ASC space), especially in the current economic conditions fraught with supply chain delays and escalating costs. In response, landlords are now offering sizable build-out allowances, often exceeding $100 per square foot, to expedite tenants’ capital approval processes.

Rental rates have seen an upturn, largely due to climbing interest rates and construction costs, ranging from $28 to $32+ per square foot, depending on factors like lease term, improvement allowance, and tenant credit. Coupled with operating expenses often exceeding $20 per square foot, gross rental rates can easily surpass $50 per square foot. Annual rent increases have pushed to and above 3% due to continued higher inflation.

Looking forward, this shift in the healthcare market is likely to spur innovation and drive the development of more efficient, flexible, and patient-friendly facilities. With the continued transition towards value-based care and outpatient services, the leasing of ambulatory care clinics and surgery centers is poised for growth. By choosing to lease, healthcare providers are not only positioning themselves to adapt to the evolving demands of their patient population but also capitalizing on opportunities to innovate and enhance the delivery of care.

Robust New and Renewal Leasing Activity Continues

In the midst of slowdowns within healthcare real estate development and investment sales, the leasing landscape for medical spaces continues to thrive. Although telemedicine has carved its niche, there remains a steadfast demand for treatment within physical medical facilities. Minnesota has a particularly robust healthcare ecosystem that includes several strong health systems and independent clinic groups that collectively continue to fuel our leasing activity. The activity we’re seeing is comprised of:

New Leasing

Numerous medical groups are expanding their footprint by establishing additional locations. Others are strategically assessing their real estate portfolios, opting to consolidate and amplify their presence in successful market areas. Patient experience is paramount, and with current challenges in the labor market, so is staff experience. Many groups acknowledge that their real estate choices can significantly influence both. They are opting to lease space within high-quality, conveniently situated healthcare facilities.

Renewals

Groups often find themselves content in their existing space and decide to extend their lease. Conversely, certain groups grapple with financial constraints that impede immediate expansion or relocation. While construction cost fluctuations and supply chain issues have eased post-pandemic, they continue to present challenges. Paired with current high interest rates, these factors can make the process of moving and constructing new clinic spaces particularly challenging. While Landlords are happy to keep their tenants, they have less flexibility to negotiate rental rates than in the past. Publicly traded real estate investment trusts (REITs) may be the most constrained, as they are driven by Wall Street’s demand for robust portfolio growth, which takes rent reductions off the table.

Property Spotlight

A shining example of a building that has experienced great recent new and renewal leasing activity is the Helene Houle Medical Center in Vadnais Heights, MN. The 56,700 square foot medical facility recently welcomed the 22,000 square foot Allina Health Surgery Center, and extended the lease of The Urgency Room’s successful site. Both entities are positioned to offer accessible, top-tier healthcare to the north central metro community for years to come.