Gwinnett County ruled the region in growth throughout the 1980s and rose to become the fastest growing county in the United States. As this county shifted from an agrarian to an urban center, the need for healthcare services grew.
This county was largely in equilibrium throughout the last up cycle. As new product delivered, it was absorbed by growing demand for medical office space and vacancy levels hovered between 6% and 15% in the ten years preceding the third quarter in 2007.
But by the fourth quarter of 2007 as the economy became less stable, vacancy in medical office product shot up to over 20% where it has remained through this quarter—topping out at 24% in the third quarter of 2009. Vacancy can rise this quickly due to one of two events: an increase in the supply of available medical office space or a decrease in the need for such space driven by medical service providers leaving the market or contracting in size.
In this case, the significant increase in vacancy came as a combination of new delivery to the market that was started in better times but didn’t deliver until late 2007 and a complete drop off in demand for new space by the medical community.
The over optimism of supply was to be expected, but the drop in demand is the story. Beginning with the stock market plunge and continuing through the election and healthcare debate, demand for medical office space has shrunk to nearly zero throughout the Greater Atlanta market. Physicians and hospitals have largely opted to say in short term arrangements and have eschewed growth in their businesses. We believe this was initially because of the catastrophic drop in personal net worth by physicians (and endowments by hospitals), but eventually because of uncertainty in the healthcare debate.
As we enter the third quarter of 2010 we expect to see supply remain constant (due to lack of financing and a recuperating developer base in the county) but demand to rise consistently through the second quarter of 2011 and eventually reach equilibrium under 15% by the fourth quarter of 2011. As demand increases, we expect that incentives (free rent and oversized tenant improvement packages) will be reduced, but that there will be minimal rate growth.
We’ve seen hints of it already, but an additional Thirty Million insured in this country will likely place hospitals as the big winners in this new era. We predict that the old lines of genteel competition among hospital systems will come down as hospitals rush to compete for a new 10% of the population that are brought from the worst paying patients up into better than average category.
Gwinnett County will be ground zero for this increased competition. Gwinnett has traditionally been dominated by Gwinnett Medical Center, but we are already seeing intrusions by other competing hospital systems providing urgent care, primary care and imaging services. We also predict a shift from on campus real estate into community nodes that will bring critical services to the consumer.
