As seen originally in the Colorado Real Estate Journal – Health Care, Senior & Life Sciences Quarterly – July 2023 

Colorado Springs, the City for Champions, is not only renowned for the Olympic Training Center and Olympic Museum, or its vast outdoor recreational opportunities, but also for its thriving health care industry. In recent years, the city has experienced a notable population surge, with many individuals and families choosing to make Colorado Springs their home. This population growth, combined with an aging demographic, has led to an increased demand for health care services. Consequently, health care providers have been expanding their facilities and establishing new medical centers to meet the growing needs of the community.

Vacancy rates. When examining the health care real estate market in Colorado Springs, it is important to consider the vacancy rates. While the overall office vacancy rates in the city hover around 10% (CoStar), it is crucial to note that the reported medical real estate vacancy rate of 29% (CoStar) can be misleading. This discrepancy arises due to several factors. First, some office spaces are listed as medical without meeting the necessary requirements, leading to an inflated figure. Second, certain prohibitions and lease restrictions limit the use of existing spaces for medical purposes. Lastly, the presence of a few large-block spaces hitting the market at the same time are skewing the numbers. In reality, the availability and vacancy rate for high demand spaces ranging from 4,000 to 7,500 square feet are even lower. Furthermore, the lack of new construction projects currently underway is expected to maintain downward pressure on vacancy rates, especially for well positioned, true medical office building assets.

Challenges. The health care real estate market in Colorado Springs faces several challenges that impact its growth and development. First, the limited supply of new construction projects poses a significant hurdle. Currently, only 4,000 sf are under construction in the entire market (that are not associated with a hospital system), which falls short of meeting the demand. Moreover, high interest rates and construction costs add to the challenges faced by developers and providers. These factors make many projects financially unfeasible, as the cost of borrowing and construction expenses outweigh the potential returns. Developers may need to adjust to a higher capitalization rate in the market, leading to higher rents for tenants and potentially making projects even less feasible. Additionally, health care practices and tenants are struggling with provider and support staff labor shortages, making it difficult to generate enough revenue to cover the higher rental costs. Furthermore, reimbursement rates from payers are not keeping pace with rising expenses. 2022 was a reassessment year, the higher taxes put more pressure on landlord and tenant operating costs. This further impacts the feasibility of health care real estate projects in the region.

Growth potential and opportunities. Despite the challenges, the health care real estate market in Colorado Springs presents significant growth potential and opportunities. The city’s population growth and the increasing demand for health care services create a strong foundation for future development. As the market matures and adapts to the growing needs of the community, there is room for innovative solutions and investments to help address the challenges of limited supply and high costs. For example, it is imperative to have all team members involved from the very beginning of project conception. Collaborations between developers, lenders, construction contractors, vendors and health care providers save substantial time and costs. Landlords need to get creative in incentivizing tenants. Creating spec suites with highly usable, and somewhat flexible floor plans helps providers by offering a quick solution to their growing practice, and, most importantly, saves time and issues for the provider. Additionally, there is an opportunity to focus on enhancing the quality of health care facilities, incorporating advanced technology and adopting patient centered design principles.

Conclusion. The health care real estate market in Colorado Springs is witnessing growth and facing challenges simultaneously. The city’s population surge and increasing demand for health care services underscore the importance of expanding and improving health care facilities. However, limited supply; volatile and high interest rates; labor shortages; and construction costs present obstacles that need to be overcome. By addressing these challenges and leveraging the growth potential, stakeholders can contribute to the development of a robust and sustainable health care real estate market in Colorado Springs, allowing providers and staff to focus on the most important aspect of the industry, the patient experience and patient outcomes.

Colorado Real Estate Journal – Health Care Quarterly July 2023 Edition

Picture of Paul Rubley

Paul Rubley

Director Healthcare Advisory, Olive Real Estate Group, Inc.