This is an HTML version of anarticle that ran in Real Estate Forum. To seethe story in its original format, click here.

|

In an atmosphere where doctors are doing more with less—seeingmore patients in less square footage and in less time—the medicaloffice industry is still booming. With outpatient, ambulatory carefacilities and urgent care centers popping up in retail marketsaround the country, some markets are having trouble meeting demand.Most experts are agreeing that medical office is the newretail.

|

“Right now there is this healthcare euphoria; people are in lovewith owning healthcare-leased assets,” says Toby Scrivner, directorof healthcare for Stan Johnson Co. “Activity is at an all-time highand we're on pace to break last year's record.”

|

Scrivner says demographic trends created an investor pool thatrecognized the aging boomer population and bonds. “It's thestability of the asset class,” he says, and it's creating a newpool of investors whose numbers have swelled recently, thanks inpart to the positive reports in publications like GlobeSt.com,sister organization to Real Estate Forum.

|

Scrivner points to the dichotomy between capital leases andoperating leases. “Hospitals are reluctant to enter into long-termleases because they has a negative effect on their balance sheets,”he says. “But it's virtually impossible to deliver without thebenefit of a long-term lease—it doesn't make financial sense.Capital leases negatively affect the balance sheet, but it'simpossible to deliver cost effectiveness without that long-termlease.”

|

A lot of new designs are hitting the suburbs, according toScrivner. Physicians' groups are bringing clinical spaces tothese markets. Sometimes taking retail spaces, these clinicalspaces range in size from 15,000 to 30,000 square feet and are usedby regional operators for urgent care facilities.

|

But all this moving to the suburbs would mean nothing if not forthe Affordable Care Act, which Scrivner says is phasing out theindividual practitioner who now may be employed by the hospital.The ACA has required the implementation of electronic records and,says Scrivner, for a lot of physicians, the costs don't justify theexpense. “So we're seeing a lot of early retirement, withphysicians leaving the marketplace at 60 or 70.

|

“The new marketplace has also created mergers and acquisitions,”he continues. “Hospitals are actively seeking practice groups whenthey can acquire the patient group that the practice group hasaccess to.”

|

Scrivner says because of the demand for acute care andpost-acute care facilities, cap rates have been compressed 45 basispoints year over year. “It's due to the frenzied demand and limitedsupply,” he says.

|

He doesn't see that supply chain changing, though he's cautiousabout expanding footprints. “There's not a lot of new developmentexcept in urgent care and freestanding emergency rooms.” Hebelieves demand will continue for the foreseeable future, withindividual 1031 investors and many investors eyeing memory caredown the road.

|

Mindy Berman, managing director of healthcare and capitalmarkets for Jones Lang LaSalle, says historically, healthcare hasbeen a niche. But more mainstream investors have come around to seethe returns. “The cap rate premiums are compressed relative toother property types, and MOBs held up well during the recession.Publicly traded healthcare REITs make up 13% of total equity REITcapitalization. But in the past four years, healthcare real estateraised 29% of new capital—disproportionately more capital amongREITs.”

|

Through a still sluggish economy, she points to low risks forinvestors and much higher returns than money markets or CDs. That,and the low interest rates, make medical office real estate a goodproposition for investors. Berman credits the success in part tostable, long-term leases, good credit tenants that don't movefrequently resulting lower risk of vacancy.

|

Build-out, however, is far more expensive—frequently twice asmuch as using existing space. Favorable locations are close tohospitals, making tenants less likely to move. And it's often noteasy to move a medical office where much of the equipment involvesimaging equipment, lead vaults and labs.

|

Berman says an aging population has spawned an interest insenior living. “Senior housing is growing and is culturally moreaccepted,” she states. “And the first generation baby boomers areright behind them. In memory care, people are living longer—this isa hot growth area. But the risk factors are different as people ageout. It's transient in nature.

|

[IMGCAP(1)]

|

“With medical office, we're talking about a 100-basis-pointpremium, with secondary and tertiary markets trading at lower caprates. Would you buy office in El Paso? No. Would you buy medicaloffice in El Paso? Yes, on a risk-adjusted basis the returns aresuperior.”

|

With $5 billion to $6 billion of trading in medical office peryear, the universe of investors becomes smaller. “Values have goneup dramatically,” she says. “I've seen $1,200 per square foot, butthat's an aberration; the average is $250.”

|

The ways in which healthcare is structured have also changed.Twenty years ago, if a person broke a bone—they went to thehospital. Not so now. Healthcare is changing to an outpatientenvironment, according to Berman.

|

“The mountain had come to Mohammed,” she says. “Many, manyprocedures are now done outside of hospitals. And hospitals arebuilding offices within communities where you can get youroutpatient care, you have urgent care in a retail setting, you haveCVS walk-in clinics—it's convenient. Medical office has highparking requirements and retail can handle that—urgent care isaDevelopment has picked up since thedownturn, Berman says, but that's been compounded because doctorshave been reticent to acquire more space. “There is virtually nospec building that occurs,” she observes. “Though definitely morethis year than ever before.”

|

One trend Berman is seeing is the consolidation of hospitalsystems. “Look for them to get larger and larger with more doctorsin one location,” she says. “Also, the investor appetite foroff-campus is improving and it's proving to price out at the samerate as on-campus sites.”

|

The Affordable Care Act has left the healthcare system reeling.Berman says the expansion of coverage to an additional 32 millionpeople will presumably cause the need for more real estate, thoughthat wave hasn't yet manifested. Waits are still long and there arenot more doctors. In fact, many doctors are opting for earlyretirement rather than making the necessary changes to theirpractice for the ACA or join a massive doctor- or hospital-ownedgroup. Some areas of practice are more efficient due to changes intechnology, but the square footage per patient is shrinking—demandis being delivered through the same space. On the other hand, we'renavigating away from pay-for-service and migrating towardpay-for-outcomes—if patients are readmitted, they won't get paid,so the focus is on post-acute care and that's where the rehab,nursing and post-acute-care facilities come into play.

|

[IMGCAP(2)]

|

Glen Perkins, executive vice president and managing director ofhealthcare development at PM Realty Group, agrees on how the ACA isimpacting the landscape of healthcare real estate. “ACA hascompletely changed the dynamics, it's changed the outlook” he says.“We've added 32 million to the ranks of the insured. We've gotaging baby boomers and the over-65 crowd is 10 times more likely todevelop cancer than any other demographic. They're getting facelifts, elective surgeries. All these things add up.

|

“Another thing we're seeing with the ACA is uncertainty amongphysicians,” he adds. “I believe there will be a shortage ofphysicians in the future—they are disappointed in reimbursements.They are seeing more and more patients and less and less money.

|

“It used to be that everyone would go on-campus for a procedure,but now the demand is for the outpatient facilities. There arefreestanding emergency centers, birthing centers—these places arecoming into the communities. We're seeing a lot of adaptive reuseon high-traffic corners where you can often get in at a lowercost—not always a significantly lower cost than a new build, andsometimes even an increased cost. But hospitals will stake theirclaim either way.”

|

As far as new construction goes, Perkins says there is a lot ofcompetition for the best and the brightest physicians with asignificant 64 million square feet of medical office space requiredover the next decade. Patients are demanding a more hotel-likeatmosphere with ample windows, concierge, coffee bars and evenpiano players. There are also now more private rooms than ever withpatients driving the demand.

|

Guy Liebler, president of Simone Healthcare, says that thehospital used to be the epicenter of healthcare life—now it's partof a spectrum. Only the most serious of care comes from thehospital and as time goes on, we'll see more and more specializedhospitals.

|

What we have now, according to Liebler, are practices owned andoperated by hospitals or groups of physicians. No longer is thelone doctor's office on the corner. “It is all done in-house withreferrals and efficiency lowering cost,” he says. “We can't cut anymore dollars out of the system, so we have to change the system.Hospitals have been cutting costs, but you can only do that for solong.

|

“Healthcare is now becoming a retail business. It's near whereyou work and live,” he adds. “There is much loweroverhead—literally 10% of the price of hospitals. It's a changingindustry with the hospital to patient-driven retail model. Justlook at all the urgent care facilities in retail centers. It has tobe a great location and economically sound.”

|

One trend Liebler agrees with is the consolidation of hospitals.“They need to be bigger for the economics to work,” he says. “Theyneed the continuum of care model with sub-specialty centers oncampus. In order to get the economics right, you have to get thebuildings right and efficiently take care of patients—it's a muchmore sophisticated and strategic model. It's all about gettingpeople into the right buildings.”

|

Liebler also concurs with the ACA's strain on the system,starting with the number of doctors available to take care of morepatients. “We have to act quicker to become more efficient. Thegovernment says you can't change the quality of care, so you mustbecome more efficient without lowering the quality of care.

|

“Everything is just getting bigger. Think of it like interstatebanking was 20 years ago. Now everything is the same few banks.This is what is happening,” he adds.

|

Christopher L. Stai, managing director of Brown Gibbons Lang |Real Estate Partners, says, ”The primary driver that we seeinfluencing the location and utilization of medical officebuildings is the unyielding mandate for healthcare providers toreduce costs and increase market share and profitability.”Outpatient facilities are inherently much less expensive to buildand operate.”

|

[IMGCAP(1)]

|

Healthcare systems and hospitals continue to look for ways tomove or extend services out of the hospital and into communities.With continued advances in healthcare technology, along withphysician extenders, such as nurse practitioners and physicianassistants, medical office buildings are delivering a wide range ofhospital services in a cleaner, lower cost environment. “Today'scommunity-based ambulatory care centers allow patients toconveniently attain the highest quality healthcare from the besthealth systems, right in their own neighborhood” he states.

|

Stai also agrees that medical office is the new retail. “Whileon-campus medical office buildings have historically been preferredby hospitals and investors,” he states, “highly visible andconvenient off-campus locations are becoming increasingly moreattractive for hospitals and consumers alike.”

|

Healthcare providers are utilizing a retail strategy thatinvolves bringing healthcare services into the community andbroadening the system's geographic outreach to its patient base,providing greater patient engagement, and allowing for higheracuity referrals to the main hospital campus.

|

“Today, more and more primary care physicians are becomingemployed physicians as a result of healthcare reform and ACOs,”says Stai. “With hospital ERs and PCPs operating at or close tofull capacity, retail locations, staffed with fewer physicians andmore physician extenders, are becoming increasingly more importantin managing a community's patient volume with lower acuity and lesscomplex procedures, which could also reduce hospital readmissionsand related costs.”

|

[IMGCAP(2)]

|

Kate Morris, first vice president of healthcare services groupwith CBRE, points out that healthcare is changing daily. “Medicaloffice is doing really well,” she says. “In some cases, there is nospace for hospital clients and that translates into great sales. Inthe 2,000- to 5,000-square-foot range we have seen some vacanciesas hospitals are trying to fold primary care physicians intohospital groups. In this game, whoever holds the most primary carephysicians wins.”

|

Morris agrees with the retail assessment. “Women in the familygenerally do the choosing of the doctor. They are out doing theshopping and they are the ones who see the signage for thephysician's office. The key is to be visible. It is more consumerdriven,” Morris says. “But the trend is for the care to be outthere in the communities. Oncology, surgery—that will still takeplace in the hospital. But doctors want to be in retail in thoselarge planned communities, in those gated communities.

|

“We are not seeing as many hospital beds as we are a repurposingof that space,” she notes. “Only the sickest of the sick need to bein the hospital,” says Morris.

|

Morris sees the pros and cons to the ACA. “People feel likethey're losing right now, but they're not,” she asserts. “Peoplewho put off knee surgery for a year, or were going to go without itfor life, are now getting that knee surgery. There is more volume,and that's tough. We'll see what happens when the subsidies falloff. Physicians are definitely stressed out and not happy.

|

“So while doctors are joining or creating big physicians groups,a large percentage will retire. You're going to see a lot morenurse practitioners, Walgreen's and Walmart clinics,” saysMorris.

|

Advances in technology are behind the phenomenon of not seeingdoctors. A patient with a heart condition might work instead with anurse practitioner who monitors the patient's weight and bloodpressure via phone. “In the past you would have had to go into yourdoctor for this,” Morris “There are all kinds of monitors that takethe place of regular doctors' visits; doctors are now paid to keepyou out of the hospital. One thing I know is that there are a lotof people working really hard and the system is trying to do whatit can.”

Want to continue reading?
Become a Free ALM Digital Reader.

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.