Spec MOB May Be Thing of the Past

SAN DIEGO-Changes in healthcare reform are changing the healthcare real estate development landscape. GlobeSt.com recently spoke with Randy Regier, president, and Joe Lowe, newly appointed director of healthcare design firm Taylor, to discuss how these changes are impacting healthcare space and what the future looks like in this arena.

GlobeSt.com: What impact will Joe's new appointment have on your firm?

Regier: I think Taylor already has a great reputation in the San Diego market, and we felt it was a great fit to add Joe. Taylor has already been in the works with Scripps on a big medical-office building, and part of the task of giving local presence was to help with that project going forward. Also, we're better serving our clients' needs by having local presence down there.

Lowe: Taylor was looking for someone with established relationships, and I've been in that market for the past 10 years.

GlobeSt.com: What are you noticing is changing in healthcare real estate design?

Regier: Healthcare reform is institutions. The people we do business with have tightened up their capital and are prioritizing what they're spending it on. This really put a damper on the market. The combination of the recession and Obamacare and healthcare reform coming down on healthcare at the same time is driving a lot more urgent discussion about services outside of an acute-care environment, where it's expensive to provide services. It's driving into the outpatient, and there's more development on the medical-office side.

There's also less of a tendency now for developers to build speculative MOB space because it's hard for them to define who their client is today. Institutions are organizing more around different ways of delivering medical care. They are working to organize in concert with medical practices.

Lowe: I think another trend that's driving outpatient services is that patients have access to a lot more information. Because technology is changing, there are more outpatient types of procedures, and providers can do more outpatient procedures in a medical-office setting. It's a quicker and faster way for patients to get to their care; they don't have to go to a hospital and deal with long wait times. All hospitals are looking for ways to help provide that, but they're providing it in a medical-office setting.

GlobeSt.com: What other changes are you noticing?

Regier: We're seeing more institutions forge provider partnerships to provide broader access to care. They're aggregating expertise to provide a stronger base. There are a lot more partnerships forging for very specific purposes as well as consolidations within the industry.

We're also seeing fewer small physician practices—three or four physicians leasing out 2,000 to 5,000 square feet in a building. More are aggregating and forming larger groups. Whereas medical office buildings used to house small tenant groups, we're now seeing whole floors or buildings being leased. It's becoming more and more difficult for the small provider to make it on their own.

As a result, investors and developers are building larger MOB space. It's interesting because developers haven't historically been our clients, but for the past few years, we've been having more conversations with them. They've been trying to figure out who their client really is these days. It's a challenge: you can't just build a spec MOB and expect to fill it. You have to identify the institutional base or some of the larger medical practices that have been formed.

GlobeSt.com: So, how likely is it that developers are going to be building just shells and then customizing them once the individual tenants are signed?

Regier: It's hard to risk that  until there's a little better understanding of how it's going to be used and by which medical group—if you're going to put in a surgery imaging center vs. primary care, it's a little bit different model.

Lowe: Developers are trying to address the tenants they're going to have as opposed to the building they're going to build. There has to be some kind of deal struck where you know who your end user is going to be before you start developing it or even where you're going to develop it. Where is the right spot to put it? You're starting with who are your customer base is to understand your demographics, and you're seeing more specialization within the care.