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RECI July 2016 Metro Chicago Core MOB Snapshot

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RECI July 2016 Metro Chicago Core MOB Snapshot

  1. 1. Real Estate Counselors International, Inc. 1 July 2016Metro Chicago Core MOB Market A market report for healthcare real estate professionals 2nd Quarter 2016 METRO CHICAGO CORE MARKET MEDICAL OFFICE BUILDING SNAPSHOT Quarterly Change in U.S. Gross Domestic Product, 2005 Q1 to 2017 Q1 Sources: U.S. Bureau of Economic Analysis and Real Estate Counselors International, Inc. Quarterly Change in United State and Metro Chicago Employment: 2008 - 2015 Sources: United States Bureau of Labor Statistics, Moody’s Analytics, and Real Estate Counselors International, Inc. Metro Chicago Core MOB Market Total Private Sector Job Growth Sources: Illinois Department of Employment Security and Real Estate Counselors International, Inc. *Note: MOB jobs are defined to include selected ambulatory healthcare establishments, including: (1) Offices of Physicians; (2) Outpatient Care Centers, (3) Offices of Other Health Practitioners; and (4) Medical and Diagnostic Laboratories. Executive Summary We remain in the fourth longest expansion in the nation's economic history, according to data available from the U.S. Bureau of Economic Analysis. In fact, nearly 15 million jobs have been created since mid-2010. Although real GDP growth over the last three quarters has been weak, consumer spending remains strong and Moody’s Analytics believes that this sector of the economy will drive the U.S. expansion in the second half of the year. Real consumer spending surged in the 2nd quarter, the fastest rate since the 4th quarter of 2014. U.S. job gains remain strong, with no indication that this will not continue. Nationally, the healthcare sector including both Hospital and Medical Office Building jobs* are growing at a strong pace and are forecast to continue their recent strong growth trend, according to Moody’s Analytics’ forecast model. Job growth in metro Chicago is forecast to remain moderately strong through at least year-end 2017, a direct result of growth in Construction, Leisure & Hospitality, Professional & Business Services and Education & Health Services jobs. Private sector construction, principally construction of industrial, office and multifamily structures is fueling most of the growth in construction jobs. The metro Chicago Core MOB market, which includes Cook, DuPage and Lake Counties, contains 3.0 million total private sector jobs and 436,000 jobs in the Healthcare and Social Assistance sector. Between 2012 and 2015 alone, this sector has added 35,000 jobs to the core market, reflecting an annual average increase of nearly 3%. Metro Chicago Core MOB Market Highlights as of the 2 nd Quarter 2016  The average gross asking rent was $22.36 PSF, reflecting steady increases since 2012, and despite recent negative net absorption.  Negative net absorption in the first half of 2016 was largely driven by the vacation of a single medical office building (153,000 square feet) located on the near south side of the city of Chicago.  Vacancy Rate: 13.7%, up from 12.3% in the 4th quarter 2015; above pre-recession level of about 10.0%.  Square feet of MOB’s under construction remains historically low at only 0.84% of existing inventory; approximately 20 other medical office buildings totaling 850,000 square feet, are proposed for construction. Metro Core MOB Market Outlook The Metro Chicago Core MOB Market is showing signs of slowing space demand but a continued trend of rent growth, as new supply remains low. The vacancy rate is expected to decline over the long-term, but may remain flat over the short-term. Still, the long-term demand outlook for MOB space in the Metro Chicago Core Market is positive. We expect MOB job growth to remain strong and in turn fuel stronger demand for MOB space. ‐10.0% ‐8.0% ‐6.0% ‐4.0% ‐2.0% 0.0% 2.0% 4.0% 6.0% 8.0% GDP Annualized Percentage Change  Year/Quarter ‐8% ‐7% ‐6% ‐5% ‐4% ‐3% ‐2% ‐1% 0% 1% 2% 3% 4% Annualized Quarterly % Change Year/Quarter United States Chicago‐Naperville‐Elgin, IL‐IN‐WI Metropolitan Statistical Area 16,652 ‐16,096 ‐160,302 ‐92,837 52,756 56,531 44,090 53,849 46,607 ‐180,000 ‐160,000 ‐140,000 ‐120,000 ‐100,000 ‐80,000 ‐60,000 ‐40,000 ‐20,000 0 20,000 40,000 60,000 80,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 Change in Jobs
  2. 2. Real Estate Counselors International, Inc. 2 July 2016Metro Chicago Core MOB Market A market report for healthcare real estate professionals 2nd Quarter 2016 Medical Office Building* and Hospital Jobs: United States and Metro Chicago Sources: U.S Bureau of Labor Statistics, Moody’s Economic.com and Real Estate Counselors International, Inc. Demand for off-campus medical office buildings (MOBs) over the next several years, will be fueled by increased focus on outpatient services by hospitals and physician groups; continued movement of outpatient services to superior off-campus locations with high identity and superior accessibility; and an increasing diversity in the mix of practice types at off- campus locations, including those traditionally found at hospital locations. Trend of MOB Average Gross Asking Rent for Metro Chicago Core Market Sources: CoStar Group, Inc. and Real Estate Counselors International, Inc. Note: All figures represent annual quarterly averages, not quarter-end figures. Core Market Vacancy Rate by Class Sources: CoStar Group, Inc. and Real Estate Counselors International, Inc. Note: All figures presented in this graph reflect quarter-end statistics, not quarterly averages. METRO CHICAGO CORE MARKET MOB DEMAND/SUPPLY After more than two years of positive net absorption, the market exhibited negative absorption in the 2nd quarter of 2016. Although net absorption was positive in the 1st quarter, absorption in the 2nd quarter was negative, a trend, this significant, not seen since 2013. However, upon further investigation, we determined that the negative absorption was largely driven by the vacation of a single medical office building (a 153,000 square foot building) located on the near south side of the city of Chicago. Despite little new construction in the first half of 2016, the vacancy rate was reported at 13.7% at the end of the 2nd quarter 2016 or 70 basis points higher than the 2nd quarter 2015. Metro Chicago Core Market Demand/Supply: Deliveries, Absorption, Vacancy and Change in Average Rent Sources: CoStar Group, Inc. and Real Estate Counselors International, Inc. Notes: (1) Percentage change in rent YTD 2016 Q2 represents the change since year-end 2015. (2) All statistics represent annual quarterly averages, not quarter-end figures. Metro Chicago Core Market & Outlying Market Demand/Supply Indicators:Q2 2015 and Q2 2016 Ind ic at o r C hic ag o M e t ro - C o re M arke t ( 1) C hic ag o M e t ro - O ut ly ing M arke t ( 2 ) N umb e r o f P ro p e rt ie s 1,154 705 To t al N e t R e nt ab le S q uare F e e t 20,375,733 11,273,774 V ac anc y R at e , 2 0 16 Q2 13.7% 11.5% V ac anc y R at e , 2 0 15 Q2 13.0% 13.4% B as is P o int C hang e in V ac anc y 2 0 15 Q2 t o 2 0 16 Q2 70.00 -190.00 Gro s s A s king R e nt , 2 0 16 Q2 $22.36 $15.25 Gro s s A s king R e nt , 2 0 15 Q2 $21.91 $15.70 % C hang e in A s king R e nt 2 0 15 Q2 t o 2 0 16 Q2 2.1% -2.9% S p ac e A b s o rb e d 2 0 15 Q2 t o 2 0 16 Q2 (i.e, Last 4 quarters) -106,003 309,701 A b s o rp t io n R at e -0.6% 3.1% S p ac e Le as e d 2 0 15 Q2 t o 2 0 16 Q2 (i.e, Last 4 quarters) 567,225 290,018 Le as ing R at e 3.2% 2.9% Sources: CoStar Group and Real Estate Counselors International, Inc. Notes: (1) MOBs containing 2,000 square feet or more located in Cook, DuPage and Lake Counties. (2) MOBs containing 2,000 square feet or more located in 17 outlying counties. (3) All figures presented in this table reflect quarter-end figures, not quarterly averages. 95.0 97.5 100.0 102.5 105.0 107.5 110.0 112.5 115.0 117.5 120.0 122.5 125.0 127.5 130.0 132.5 135.0 137.5 Employment Growth Index Q4 2006 = 100.0) Metro Chicago ‐ MOB Jobs United States ‐ MOB Jobs Metro Chicago ‐ Hospital Jobs United States ‐ Hospital Jobs $21.95  $22.84  $22.59  $23.03  $21.68  $21.03  $21.08  $21.47  $21.75  $22.40   $16.00  $17.00  $18.00  $19.00  $20.00  $21.00  $22.00  $23.00  $24.00  $25.00  $26.00  $27.00  $28.00  $29.00 94.00 95.00 96.00 97.00 98.00 99.00 100.00 101.00 102.00 103.00 104.00 105.00 106.00 107.00 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD 2016 Q2 Gross Asking Rent, Per Square Foot Rent Growth Index (2007 = 100.0) Asking Rent Gross Rent Growth Index 18.8% 13.2% 13.0% 13.7% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% Class A Class B Class C Total of Class A, B & C 2nd Quarter 2016 Vacancy Rate 9.6% 9.6% 10.9% 10.9% 12.1% 12.3% 13.5% 12.5% 12.8% 13.7% 5.5% 4.0% ‐1.1% 1.9% ‐5.9% ‐3.0% 0.2% 1.9% 1.3% 3.0% ‐240,000 ‐180,000 ‐120,000 ‐60,000 0 60,000 120,000 180,000 240,000 300,000 360,000 420,000 ‐12.0% ‐9.0% ‐6.0% ‐3.0% 0.0% 3.0% 6.0% 9.0% 12.0% 15.0% 18.0% 21.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD 2016 Q2 Square Feet (Deliveries and Absorption) Percent  (Vacancy Rate and  % Change in Asking Rent Deliveries Absorption Vacancy Rate % Change in Asking Rent
  3. 3. Real Estate Counselors International, Inc. 3 July 2016Metro Chicago Core MOB Market A market report for healthcare real estate professionals 2nd Quarter 2016 Chicago Core Market Asking Rents by Class Sources: CoStar Group, Inc. and Real Estate Counselors International, Inc. Note: All figures presented in this graph reflect quarter-end statistics, not quarterly averages. Core market leasing (gross absorption) and net absorption (i.e., space demand) has been strongest in the Class A sector since year-end 2015. Net absorption has been weakest in the Class B sector. Although there is a moderate amount of leasing activity, net absorption was flat in the first half of 2016. Chicago Core Market Leasing and Absorption Rates by Class Sources: CoStar Group, Inc. and Real Estate Counselors International, Inc. Note: All figures presented in this graph reflect quarter-end statistics, not quarterly averages. Metro Chicago Core market MOB Construction Sources: CoStar Group, Inc. and Real Estate Counselors International, Inc. Prior to the Great Recession, the gross asking rent for MOB space was +$23.00 per square foot for the metro Chicago Core market, as a whole. The average asking rent for all MOB space fell to a low of about $21.00 per square foot at the end of 2012 and has steadily risen since that time. Despite increasing vacancy over the past five years and small amount of negative absorption during the 1st half of 2015 and 2016, the average gross asking rent continues to increase. Of the three classes of properties, Class A MOBs exhibited the highest vacancy rate at 18.8%, at the end of the 2nd quarter. The Class B and Class C vacancy rates were near 13% at the end of this same quarter. Since the 2nd quarter 2015, vacancy rates have declined for Class A properties and increased slightly for Class B and C properties. The market’s largest MOBs, encompassing just over 6.7 million square feet built since 1979 exhibited a vacancy rate of 17.4% at the end of the quarter, as shown in the table below. Cl a s s A C l a s s B C l a s s C To t a l ( C l a s s A, B & C ) N umb e r o f P ro p e rt ie s 28 622 501 1,154 133 To t al N e t R e nt ab le S q uare F e e t 1,919,275 13,708,887 4,717,511 20,375,733 6,730,225 V ac anc y R at e , 2 0 16 Q2 18.8% 13.2% 13.0% 13.7% 17.40% V ac anc y R at e , 2 0 15 Q2 20.6% 12.2% 12.6% 13.0% 14.90% B a s is P nt C hg in V ac anc y 2 0 15 Q2 - 2 0 16 Q2 -180.00 100.00 40.00 70.00 250.00 Gro s s A s king R e nt , 2 0 16 Q2 $29.51 $21.67 $18.78 $22.36 $25.91 S p ac e A b s o rb e d 2 0 15 Q2 t o 2 0 16 Q2 34,216 -111,581 -20,678 -106,003 -168,292 A b s o rp t io n R at e 2.2% -0.9% -0.5% -0.6% -3.1% S p ac e Le as e d 2 0 15 Q2 t o 2 0 16 Q2 133,776 340,579 89,531 567,225 238,201 Le as ing R at e 8.6% 2.9% 2.2% 3.0% 4.3% Va ri a b l e s B u i l d i n g s b y C l a s s La rg e s t MOB s ( A l l C l a s s e s o f B u i l d i n g s wi t h 2 5 , 0 0 0 S q u a re Fe e t o r Mo re a n d B u i l t S i n c e 19 7 9 ) Sources: CoStar Group, Inc. and Real Estate Counselors International, Inc. Note: All statistics presented in this table reflect quarter-end statistics, not quarterly averages. At the end of the 2nd quarter 2016, the Metro Chicago Core MOB market inventory encompassed nearly 20.4 million square feet in 1,154 buildings, according to the CoStar property database. There are presently seven medical office buildings under construction, encompassing 1.8 million square feet of space. Five of the seven buildings total approximately 176,200 square feet. The two large buildings are the 1,056,000 square foot Ability Institute Building being developed by the Rehabilitation Institute of Chicago and located at 355 W. Erie Street, Chicago, IL (2017 delivery) and the 700,000 square foot Northwestern Biomedical Research Tower located at 320 E. Huron Street, Chicago, IL (2018 delivery). Over the last five years a total of 736,000 square feet, representing only 3.6% of the total inventory was added to the Metro Chicago Core MOB Market. $29.51 $21.67 $18.78 $22.36 $0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 Class A Class B Class C Total of Class A, B & C 2nd Quarter 2016 Asking Rent 8.6% 2.9% 2.2% 3.0% 2.2% ‐0.9% ‐0.5% ‐0.6% ‐2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% Class A Class B Class C Total of Class A, B & C Space Leased/Absorbed as a % of  Occupied Stock Leasing  Rate Absorption Rate 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 2000 Q4 2001 Q3 2002 Q2 2003 Q1 2003 Q4 2004 Q3 2005 Q2 2006 Q1 2006 Q4 2007 Q3 2008 Q2 2009 Q1 2009 Q4 2010 Q3 2011 Q2 2012 Q1 2012 Q4 2013 Q3 2014 Q2 2015 Q1 2015 Q4 % Under Construction / Inventory Square Feet Under Construction Square Feet Under Construction % Under Construction / Inventory
  4. 4. Real Estate Counselors International, Inc. 4 July 2016Metro Chicago Core MOB Market A market report for healthcare real estate professionals 2nd Quarter 2016 MOB Sales Capitalization Rates and Average Annual Prices per Square Foot Sources: CoStar Group, Inc. and Real Estate Counselors International, Inc. Since 2006, Chicago core market MOB investment sales have exhibited capitalization rates that peaked around 9.8% in 2009 and reached a low of 7.3% in the first half of 2016. The jump in the average capitalization rate in 2014 resulted from the sale of a number of smaller, older medical office buildings in that year. Investor Profile of MOB Investment Sales: Transacted Since January 2011 Sources: CoStar Group, Inc. and Real Estate Counselors International, Inc. Since January 2011, approximately 59% of Core Market MOB sales volume represents acquisitions by private equity firms. The next largest share, estimated at 19%, is associated with public REITs. METRO CHICAGO CORE MARKET MOB INVESTMENT SALES TRENDS Since 2011, approximately 45% of all MOB investment sales activity has been concentrated in three Chicago submarkets – Near-North Suburban Area, Eastern East-West Corridor and Western East-West Corridor. Sources: CoStar Group, Inc. and Real Estate Counselors International, Inc. There are 12 top buyers who each amassed over $12.0 million worth of MOBs since 2011. On average, these buyers paid $258 per square foot which is well above the market average per square foot sale price associated with all MOB sales of the last five years. These portfolio or aggregate sales ranged in price from $89.00 per square foot (Imperial Realty) to $591 per square foot (Noel F. Danto). Largest MOB Investment Sales since January 2011 Sources: CoStar Group, Inc. and Real Estate Counselors International, Inc. Note: These data may include properties that are part of portfolios located in a few other metropolitan areas. $148 $113 $148 $135 $133 $79 $194 $184 $159 $215 $217 7.7% 9.8% 7.6% 9.5% 7.3% $25 $50 $75 $100 $125 $150 $175 $200 $225 $250 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% 11.0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sales Price Per Square Foot Capitalization Rate Average Price Per Bldg SF Average Cap Rate 19% 14% 59% 8% REIT/Public Institutional Private User $0 $50 $100 $150 $200 Central Northwest Suburban Far South Suburban Joliet/Central Will Gold Coast/Old Town Far North Suburban Far Northwest Suburban North DuPage County Melrose Park Area O'Hare Cicero/Berwyn Area South Route 45 Lincoln Park Central North Suburban Northwest City Near South Cook County City of Chicago ‐ South Schaumburg Area Oak Park Area Western East/West Corr Eastern East/West Corr Near North Suburban Millions of Dollars # Buyer Acquistion Total Square Feet Price PSF 1 MB Real Estate $159,365,903  562,167  $283  2 Griffin Capital Corporation $65,054,500  289,586  $225  3 Healthcare Trust of America, Inc. $54,000,000  139,200  $388  4 Harrison Street Capital $47,900,000  89,903  $533  5 Duke Realty Corporation $47,750,000  104,912  $455  6 Inland Real Estate Group of Companies, Inc. $44,115,684  132,919  $332  7 Cole Real Estate Investments $40,299,000  135,448  $298  8 MedProperties Group $38,495,000  233,644  $165  9 Imperial Realty Company $32,689,553  365,633  $89  10 Dupage Medical Group $20,600,000  72,600  $284  11 Patriot Equities L.P. $15,300,000  97,009  $158  12 Noel F. Danto $12,300,000  20,800  $591  Total/Average $577,869,640  2,243,821  $258 
  5. 5. Real Estate Counselors International, Inc. 5 July 2016Metro Chicago Core MOB Market A market report for healthcare real estate professionals 2nd Quarter 2016 CORE MARKET AREA DEFINITION AND MOB INVENTORY            Sources: CoStar Group and Real Estate Counselors International, Inc.             Note: Medical office properties containing 2,000 square feet or more located in Cook, DuPage and Lake Counties   Real Estate Counselors International has relationships with healthcare providers, private equity firms, financial institutions, developers, investors, government agencies, major corporations, and other public and private concerns. Among our specialties are:  Stark law Compliance  Fair Market Value Rent Studies  Property Appraisals  Acquisition Due Diligence  Disposition Pricing  Forensic Due Diligence/Evaluations  Portfolio Valuations  Litigation Support/Dispute Resolution  Market Feasibility Analysis Since 2007, Real Estate Counselors International Inc. has performed a spring and fall survey of medical office buildings in the metro Chicago market. Our proprietary database contains hundreds of contract and asking lease terms collected over the last several years. For More information, please contact: Thomas Amato, CRE at 312.332.4000 X101

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