Medical office space grabs attention on the First Coast (Courtesy of the Jacksonville Business Journal) — Five years ago, Greenville, South Carolina-based real estate investment company RealOp purchased an underperforming office park in Englewood called Central Park.
The price tag was just over $10 million — a big drop from the $17.7 million the previous owner had paid for the property in 2006.
Things didn’t improve much over the following years as the property, rechristened 3728 Midway, saw occupancy stand at 51% in July 2020.
Then things began turning around, due in part to a jump in interest in medical office space on the First Coast.
Occupancy of the three buildings totally 220,000 square feet is now at 87%, with 21 new leases totaling 104,900 square feet and eight lease renewals totaling 43,794 square feet signed since 2020. About a third or more of the tenants are medical-related enterprises.
The average lease rate has gone up by $3 a square foot, said Duke Addison of Addison Commercial, who represents the building’s owner.
“Great landlord, great tenants, great team — and it all kind of came together,” he said.
3728 Midway isn’t the only commercial space to see its fortunes buoyed by a surge in medical office uses. Across the First Coast, medical office space has been a bright spot in the local commercial real estate market, spurring new development and bringing investors into the market.
“It really speaks to the makeup in Jacksonville, the academic base, the level one trauma and the multiple health care systems,” said JLL Managing Director Lucia Hedke, who is leading the brokerage’s medical office front in Florida with partners throughout the state. “Mayo’s presence and activity definitely adds to the mix … and they are a reason health care technology wanted to be in that market.”
Stable tenants
While the overall office sector struggles in the wake of Covid-19, the growth in medical uses has led to more stable tenants that generate high foot traffic in an unavoidable aspect of their lives: their health.
Area developers also point to major health systems expanding their footprints outside of traditional hospitals into different areas of town or other counties altogether to accommodate an ageing population and large influx of people.
“It’s a higher acuity use, those tenants tend to stay and reinvest in their space,” said Elliot LaBreche, founder and managing director of real estate investment firm Vitalis. “They don’t move around a ton.”
Vitalis, based in Miami, bought the 10,647-square-foot St. John’s Interventional and Vascular Institute earlier this year for $3.8 million.
Located at 8767 Perimeter Park Blvd. near Tinseltown, the property is the home of St. Johns Vein Center, a vascular catheterization laboratory that is one of the few vascular testing facility in the region.
Vitalis, which has properties in 12 states, has done a variety of deals in the health-care-focused real estate space, including providing bridge loans to developers, sale-leasebacks and tenant representation.
Growth in the sector is driven by an aging population and changes in the way health care is provided, with services like surgery, imaging, gynecology or orthopedic care taking place outside of hospitals.
“You have insurance companies pushing health systems to deliver care in a more cost-effective way, and that’s not in a hospital. It’s really in these outpatient facilities,” LaBreche said. “There are a lot of growth drivers for these facilities to do really well.”
And those uses, in turn, can have spillover effects that are a boon to other tenants.
“It provides medical services to those people, and it provides volume and business opportunities for that small business owner that’s potentially going in the coffee shop or a restaurant,” said David Ergisi, president and CEO at Cross Regions Group.
Cross Regions began about eight years ago with a focus on general retail and then pivoted toward medical, with the developer working with medical offices and surgical facilities.
The company now has large medical retail works in development in Duval, Nassau and St. Johns counties, including The Fountains at St. Johns and its 200,000 square feet of retail, restaurant and medical/office space
That includes a two-story, 12,000-square-foot building nursing training facility for Jacksonville University, with graduates expected to benefit from the nearby Ascension St. Vincent’s – St. Johns County, which in 2022 opened a 150,000-square-foot hospital and 82,500-square-foot medical office building near the intersection of County Road 210 West and Interstate 95.
Cross Region Group’s work also extends to downtown Jacksonville, where Duval Station will have 100,000 square feet of retail space, professional and medical offices on nine acres located at North Main Street and Max Leggett Parkway. The first phase of construction includes a 12,000-square-foot medical office building leased by Millennium Physician Group, and the development will include multiple medical offices and a laboratory.
Growing importance
While absorption of medical office space saw a slight slowdown in the second quarter, according to brokerage JLL’s first medical office report for the region, the sector’s 5.6 million square feet has become an increasingly important part of the commercial real estate landscape.
While many health care companies are expanding and upping their game, Hedke said there’s a slowdown in Jacksonville due to high construction costs. She said she expects rent to increase to cover some of those costs.
“A lot of deals just aren’t penciling out because of the cost of construction because of our capital markets. More users are looking at converting spaces to save on the cost,” Hedke said. “It’s a combination of waiting for things to settle and deliveries. A deal can be inked, but if occupancy hasn’t started maybe it will show in the report for Q3 and Q4.”
The report highlighted Mayo Clinic’s five-floor expansion and proton therapy facility, expected to be finished by the fourth quarter 2026 and first quarter 2025, respectively.
The 202,000-square-foot North Jacksonville VA Clinic is expected by second quarter 2024, and the 25,000-square-foot Branan Field Medical Office in Middleburg, is expected by the end of 2023.
“Despite the current economic conditions, the Jacksonville market’s prime location in North Florida present opportunities for the development or repurposing of existing medical office buildings to meet evolving market demands,” the report stated. “However, with improving economic conditions and a stabilizing market, the outlook for the rest of the year remains optimistic, anticipating a potential rebound in leasing activity.”
That’s in part due to the area’s medical infrastructure helping to continue to attract tenants.
The success of 3728 Midway, Addison said, has a lot to do with its proximity to Baptist Hospital, Memorial Hospital and Brooks Rehabilitation.
“It’s just a good central location,” he said.
One of the tenants benefitting from that proximity is Bernhardt Laboratories, which handles and processes test samples with a logistics network extending to clients in Miami, Orlando, Gainesville and St. Augustine.
On top of its 8,000-square-feet office space General Manager Jorge Almenara said the company, which arrived about two years ago, is looking to expand by 6,000 square feet due to storage requirements in its highly regulated industry.
He’s hoping to finish the expansion within six months. Bernhardt Laboratories also extended its lease for another six years, helping the landlord amortize costs.
“Basically, you have couriers coming in throughout the day, bringing not only specimens but supplies,” Almenara said. “So, the access point is one of the main attractions of this site.”
Other tenants include nonprofit clinic Volunteers of Medicine, which moved from downtown, prosthetics and orthotics-specialized Hanger Clinic, medical equipment supplier CE-Tech and medical courier Medspeed.
Meanwhile, Miami-based Vitalis is gearing up for another project: In the wake of the vein center acquisition, LaBreche said Vitalis has a letter of intent signed for another Jacksonville property, a surgery center.
“We’re just as interested in growing in the Northeast part of Florida because deals are a little more attractive from a buyer’s standpoint,” LaBreche said, “but the fundamental drivers for health care are there.”