Branding Helps Marriage of Medical and Retail

MISSION VIEJO, CA—Health systems are looking to create an identifiable image just like retailers are, another reason why medical users in or near retail centers work so well, NGKF Global Healthcare Services' executive managing director Garth Hogan tells GlobeSt.com. Retailers and retail landlords are well aware of the importance of brand image, making the retail sector an ideal location for medical-office space, which is becoming more populated by larger health systems looking to identify with patients.

As GlobeSt.com reported last week, pre-leasing has begun for a new 110,000-square-foot medical-office building to be constructed across from the main entrance to St. Joseph's-Mission Hospital here. NCA Real Estate is developing the property, which will include a four-story building and a five-story parking structure, and Hogan's team is handling the leasing effort exclusively for the property. We caught up with Hogan to discuss this development, how his team is handling the leasing and trends in MOB space in Orange County.

GlobeSt.com: What is unique about the Mission Viejo development that you are pre-leasing?

Hogan: It follows another growing trend of medical offices at shopping malls. There's a major retail shopping center across the freeway, so it's the perfect place. Large regional retail across the country is seen as an ideal location for healthcare. Retail typically has good patient access, good parking and visibility. Also, health systems are paying more attention to branding themselves. The Mayo Clinic, Hoag, Scripps, USC—branding is very important, and that goes along the lines of what a retail center is about.

GlobeSt.com: How are you approaching pre-leasing for the development?

Hogan: We will be taking it out nationally to all the national health systems interested in being in the Orange County market. There's a great population in Orange County, and we're taking it to local large medical groups. Our target tenant initially is a large medical group that can take advantage of large footprints and floor plates. If we can bring two groups together to create one floor, everyone will appreciate the efficiencies that that creates.

GlobeSt.com: What is the current situation with MOB space in Orange County?

Hogan: Overall, vacancy rates are fairly low in medical office in all of Orange County. Part of that is due to a lack of new construction—not a lot of MOBs have been built. The velocity of pre-leasing in South Orange County is undeniable. The demographic is strong, the payor mix is strong and the patient base is strong.

When health systems need space, they are taking large amounts of square footage, which for the most part is answering to the Affordable Care Act and how they need to have better access points to the patient population. Also, because of the ACA, many new patients are hitting the market with the ability to pay through insurance.

Other than that, traditional MOBs with small practices have stayed fairly full. In a lot of these existing buildings, where there has been more continuous space landlords have taken entire floors and have reserved that space to do full-floor deals. That has kept some of these multi-tenant buildings full as well.

The ACA has created vacancies in hospitals, and healthcare systems have been acquiring physician practices, which are vacating those spaces. In many ways, those spaces are unusable in the future because of the way they're designed—they're not efficient, you can't have multiple specialties in one location and they're not LEED-certifiable, so they have become obsolete.

However, Orange County has a more-affluent patient base that can afford private pay, so a lot of physicians have been able to stay in their markets. Others have been acquired and can't stay, so they have been vacating their spaces. I don't know if this trend will last forever, but the trend of small physician practices going into larger buildings will impact landlords.