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.
