New Medicine, More Than Raw Growth

SOUTHFIELD, MI-For the medical office sector, the diagnosis for growth seems virtually assured. Already one of the hottest and most rapidly evolving commercial real estate categories, the expansion of medical office has been given another shot in the arm by the implementation of the Affordable Care Act. The ACA seems almost certain to increases patient volumes, heightening the existing demand for the construction of new and newly renovated health care facilities.

A number of development analysts have suggested that medical office construction will continue to rise over the next several years—increasing by nearly 20% by some estimations. In the Midwest, the combination of strong existing hospital networks, an aging population, and a recovering real estate and construction marketplace, that trend promises to be pronounced for the foreseeable future. While individual markets vary, in general, the demand for high-quality medical office space remains high throughout the region. Anecdotally, Farbman Group's medical portfolio of approximately 4 million square feet is over 95% occupied.

There is much more to this trend than simply raw growth, however. The healthcare industry—and, by extension, the healthcare facilities that the industry relies on—are changing in some fundamental ways. The impact of those changes is already being felt across the Midwest and the nation, as consolidation, relocation, specialization, and the need for game-changing efficiencies drives medical office in some intriguing new directions.

Safety in numbers

Arguably the most visible and most important medical real estate trend is the growing tendency for healthcare organizations to expand or form lasting professional partnerships as a result of mergers, acquisitions, or strategic alliances. Across the Midwest, hospital systems and healthcare networks are consolidating, driven by medical and financial realities that make it tougher for small and independent entities to thrive. Bigger groups not only wield more influence and market share, they have the resources to withstand ebbs and flows in the marketplace and can adapt more successfully in what has become a more malleable legislative and professional environment. To some extent, the consolidation trend is also being driven by the need to respond to an increasingly sophisticated and technologically demanding healthcare industry: the much-discussed 2014 deadline for healthcare providers to move to electronic medical records has clearly had an impact. With financial penalties looming and potential Medicare reimbursement implications for those that have not made the changeover by next year, many healthcare professionals find themselves caught between a financial rock and a hard place. It is not too difficult to see why many smaller groups have given in to the temptation—and, in many cases, the mandate—to become part of a larger healthcare network with deeper pockets.

Innovation and Efficiency

The “bigger is better” trend has created a demand for large, high-quality contemporary facilities capable of meeting the unique demands of a diverse and dynamic healthcare network (typically these centers range anywhere from around 50,000 to 150,000 square feet). At the same time, however, these large multi-use facilities also reflect new service and patient care trends within the healthcare industry. Whether it is ground-up construction, large-scale expansion and reworking, or simply some modest renovations, premium healthcare facilities must be able to meet those needs. Longer hours and increasingly consolidated and coordinated healthcare services exert demanding new structural and operational requirements on the facility and the medical personnel that work there. The upshot is that the best of this new category of large specialty centers are not just physically bigger, they are significantly more efficient and accommodating to patients and medical staff alike. Many of them feature new architectural design elements that introduce new efficiencies and improve the experience of being treated in these new facilities. Construction is currently underway on a 100,000-square-foot center in Livonia, Michigan that typifies this next generation of larger, consolidated and more efficient medical centers. The state-of-the-art University of Michigan facility includes primary and specialty care services, eye care services, a musculoskeletal program, a wide range of diagnostic imaging capabilities and much more.

Less is more

Ironically, the other big medical office trend sits at the exact opposite end of the scale. A significant percentage of medical real estate that is not getting bigger is actually getting smaller. Largely populated by specialty outpatient services such as urgent care, physical therapy, or dialysis providers, this sub-category of medical office is based on convenience and flexibility. In clear contrast to the larger and centralized facilities that newly consolidated and expanding healthcare organizations are building, these smaller and more accessible locations are rarely larger than 5,000 square feet, and are often integrated into existing convenience retail such as strip malls. Despite their smaller size and different format, these smaller healthcare concepts are an effective complement to the new generation of large hospitals and consolidated healthcare facilities. Small sites and satellite offices can coordinate with the larger facility to more efficiently schedule and deliver patient care. On another, less practical (but perhaps no less important) level, smaller offices that are affiliated with a larger network also function as a kind of literal brand representative in the community.

Development impacts

For real estate professionals, the impact of these two trends (the consolidation trend and the corresponding proliferation of smaller, convenience-based outpatient-style clinics) has begun to change the way that medical office properties are assessed and developed. Of the two, the consolidation trend is the most consequential, as the specialized construction and development demands of the new generation of larger, multi-specialty centers are significant. From specialized medical equipment, to diagnostic, laboratory and everyday family practice requirements, these are facilities that require very specific and specialized technical, logistical and structural demands. Real estate professionals who want to be competitive in this space need to be informed and conversant about those demands, and intimately familiar with the technical and site-plan specifications that these multi-specialty centers require.

An evolving landscape

As large (and growing larger all the time) medical networks, hospitals and healthcare organizations work to identify properties, facilities and locations around the region that can accommodate this influx of large multi-specialty centers, real estate professionals will need to be proactive about understanding and satisfying those changing demands. At a time when medical office continues to expand and evolve at a rapid rate, taking the time to become informed about and engaged with the issues that influence this dynamic industry is a wise investment. From legislative and regulatory issues like Stark Law and leasing structures, to the practical and procedural challenges of integrating disparate services and departments within the same facility, real estate professionals who can stay abreast of emerging issues will be able to position themselves at the forefront of this very active regional and national real estate sector.

Andy Farbman is CEO of Farbman Group. The views expressed in this column are the author's own.