Is Converting Offices To MOBs A Prescription For Success?

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With a high demand for medical office space and an oversupply of traditional office space, why aren’t more offices being turned into MOBs?

America is oversupplied with office space, a good percentage of it functionally obsolete and destined to be torn down or converted to residential or other uses. Thanks to the pandemic, the office vacancy rate reached nearly 20% in March 2024, according to CoStar, and 44% of offices appeared to have negative equity, or property values less than their loan balances owed, according to researchers at the University of Southern California, Northwestern University, Columbia University and Stanford University.

Meanwhile, the medical office vacancy rate is about 7%, according to PwC and the Urban Land Institute, with growing demand driven by the country’s aging population, while costs to build new medical office buildings have soared to $500 per square foot, compared with $100 per square foot for renovation.

Given this, converting some office buildings to medical office space seems to be just what the doctor ordered. Unfortunately, not just any vacant or mostly vacant office building is a viable candidate for conversion.

MOBs: A Cycle Of Retrofits Followed By Ground-Up Construction

As major teaching hospitals like RUSH University System for Health planted their flag in the suburbs to be closer to patients in the late 1990s and early 2000s, we saw a trend of doctors outgrowing their space in hospitals and seeking suburban offices to set up shop. A spate of retrofitting older offices for that purpose was followed by more ground-up construction between about 2008-2020.

Within the past 18 months, however, rising costs for land, materials, labor and capital has meant almost nothing is being built new. Projects coming online now were greenlit two years ago. This is playing out as obsolete office buildings — particularly in suburban locations — are struggling with high vacancy. For those that can be acquired well below replacement cost, conversion to medical office space is still a sound investment.

Some office-to-MOB renovations will depend on the practices that will be in the building. For example, for any imaging center that takes X-rays, lead is needed in the walls so radiation can’t penetrate them. MRI machines typically must be on a slab, on the ground floor, or the floor will need to be structurally reinforced. And any services that involve the use of a gurney require wide elevators; most ‘70s- and ‘80s-era office buildings don’t have them.

The Big Three: Consumer Appeal, Mechanicals, Parking

Beyond that, whether an office building is a good candidate for conversion depends on three major factors: the “retail”-like character of the building, including “curb appeal,” visibility and access; sufficient building mechanics; and ample parking.

1. Retail-Like Appeal, Visibility And Access

As the healthcare industry has become more competitive, the ability to attract and retain patients has become increasingly important. In a recent McKinsey survey, 90% of healthcare provider executives named “customer centricity” as a top priority. Healthcare providers of all kinds are studying retail, tech and other consumer sectors for ideas, as McKinsey notes.

Thus, any aging, dimly lit office property will not do. Today, patients expect a choice of providers in convenient, attractive settings. Older offices may need a nice buildout, brighter colors and better lighting. Often, MOBs now are adjacent to other healthcare providers, retail and even residential buildings for convenience.

Visibility and access also are key to attracting not only patients, but also staff. A 150,000-square-foot office-to-medical office conversion called ArlingtonMed in Arlington Heights, Ill., a suburb of Chicago, is passed by thousands of cars every day, with signage visible from the adjacent expressway. It is part of an 18-acre, mixed-use, master-planned development that includes retail and residential buildings, which will increase traffic and make it a destination — or home — for more patients. The size of the old office building and its configuration also make it a particularly strong candidate for larger providers, offering 10,000–20,000 contiguous square feet. The building has large elevator banks at the core, allowing office space to be at the perimeter and afford views and natural light.

2. Mechanicals

Medical office buildings tend to require more heating, cooling, electrical and plumbing muscle than regular office buildings. A typical 1970s office building conversion, for example, will require more plumbing if additional restrooms are needed to accommodate the patients from all the practices occupying the building.

For basic office and medical equipment, an aging electrical panel can be upgraded. But if specialty equipment will be used – like laser, surgical, EKG, nuclear medicine or other machines — more robust electrical and a backup generator meeting complex state codes will be needed, because these machines can’t go down in the middle of a procedure.

3. Parking

MOBs typically require drive-up and drop-off spaces in front of the building and more parking than regular office buildings, especially in the suburbs, where people tend to be more car-dependent. With doctors, nurses, and other staff as well as a steady flow of patients visiting, the ideal parking ratio for MOB is five or six spaces for every 1,000 square feet, versus four for a regular office building.

Older, low-density office buildings in the suburbs typically are “under-parked,” unless they have a parking deck or can build one. This was true for ArlingtonMed. Located in the former home of a daily newspaper, it had a covered parking deck that we’ve torn down to build a new and larger structure with direct access to offices.

The Final Prescription: Choose A Specialist

Despite the long list of requirements, some buildings are good candidates for conversion to MOB. Developers considering a conversion, or providers seeking space, should tap a broker with expertise in MOBs — akin to going to a medical specialist — to help assess which offices can be revived through renovation, and which are beyond saving.

 

Source: HC+O News

Six New Medical-Type Facility Office Buildings Under Construction In Southlake, Texas

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There will be six new office buildings coming to Southlake, Texas, with four of them under construction.

There are four office buildings presently under construction (PHOTO CREDIT: Cody Thorn/Community Impact)

Eric Goodwin, vice president of office and industrial services for Champions DFW Commercial Realty, said there are four 8,000-square-foot buildings under construction and should be completed by the end of April. He said companies or businesses could start moving into the buildings in the fourth quarter of 2024.

“Construction on two 9,000-square-foot buildings could start as early as June,” said Jim Kelley, president of Champions DFW Commercial Realty. “This area has super freeway visibility and those are very limited, especially on the SH 114 corridor between Roanoke and Southlake.”

Goodwin said more than 200,000 cars passes that area of the building, which is located between Shady Lane and Morrison Park Drive on the frontage road, on SH 114.

“The buildings will either be for sale or lease, depending on the interest of a business,” Goodwin said.

Kelley said the goal of the office buildings will be medical-type facilities, but general office use will be considered. Kelley pointed out that the location is situated between Baylor Scott & White Medical Center in Grapevine and Methodist Southlake Medical Center off SH 114. The buildings will be opening in late 2024.

 

Source: Community Impact

Walmart Decelerates Health Center Expansion Plans

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Walmart launched Walmart Health in 2019, as a one-store pilot in Georgia. Since then, Walmart Health has grown to 48 locations in five states, as of late last year.

The medical centers, which are geared at patients with no or poor insurance coverage in underserved areas, are located next to or inside Walmart Supercenters. They offer a range of services, including primary and urgent care, labs, X-rays and diagnostics, dental, optical, hearing and behavioral health and counseling in one facility.

Walmart says a key differentiator of its centers is their inexpensive and transparent pricing at the point of service. The cost of services at a specific center vary based on factors like the baseline cost of healthcare services in a specific region, patient demographics and underlying area health needs.

The Arkansas-based company is one of a spate of retail giants racing to build up their primary care presence amid growing demand for affordable and convenient medical care. However, some companies have struggled to harmonize the size of their medical networks with the demand of building and operating the clinics.

Walmart says it is taking a more deliberate approach to expansion. However, the company did ratchet up its expansion plans last year before its more recent slowdown. Last March, Walmart said it would open 28 health centers in two new states, Missouri and Arizona, this year. One month later, Walmart said it would open an additional four centers in Oklahoma this year, entering that state for the first time, along with expanding its presence in Texas. Walmart previously said it planned to have more than 75 health centers operational by the end of this year.

Now, Walmart plans to hit that target in early 2025. The company delayed six planned openings in Phoenix, Arizona, due to “significant pressure on construction resources,” the Walmart spokesperson said. Those openings have been pushed back to early 2025. Four additional openings in Oklahoma City have also been paused, the spokesperson said.

Retailers are increasingly angling to snap up a larger slice of the $4.5 trillion healthcare system. Integrating primary care capabilities, whether physical or via telemedicine, allows the companies to provide a front door to the medical system for consumers and nudge them toward other services, like pharmacy capabilities, urgent care clinics, insurance offerings or medical devices for sale in stores.

As a result, the space has seen a number of multi-billion-dollar deals. Last year, CVS purchased value-based medical chain Oak Street Health for $10.6 billion and home care provider Signify Health for $8 billion, while Amazon closed its acquisition of primary care company One Medical for $3.9 billion.

Meanwhile, VillageMD — a primary care operator majority owned by Walgreens — has been actively pursuing deals with provider groups, including an $8.9 billion acquisition of New Jersey-based chain Summit Health. There was also speculation that Walmart was exploring a buy of value-based medical chain ChenMed late last year, though no deal emerged.

As a result of the activity, some 30% of the primary market could belong to nontraditional players by 2030, according to estimates from consultancy Bain. However, some retailers are struggling to manage their swelling networks. Despite a number of provider group acquisitions after gaining control of VillageMD, Walgreens recently pivoted to closing underperforming stores.

Walgreens had closed 140 of the health clinics as of March — more than double its previous goal of 60 closures to hasten the profitability of its health division. Along with its health centers, Walmart has made a number of other plays in the healthcare space, including partnering with an insurer and health system on care coordination in Florida. The company also brokers Medicare Advantage plans and offers co-branded MA plans with insurance giant UnitedHealth.

Walmart also bought a telehealth provider in 2021 and a chronic condition management tech platform in 2020.

 

Source: yahoo!finance