Consolidation In Healthcare Spurs Medical Investor To Adopt Large Tenant Strategy

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Consolidation in the healthcare industry is spurring a need for large blocks of medical office space.

Medical office building at 3531 Fashion Way in Torrance (PHOTO CREDIT: Meridian)

Medical real estate investor and developer Meridian has adopted a large tenant strategy for its latest acquisition. The property, a 26,000-square-foot medical office building in Torrance, was 100% vacant at the time of the sale and was marketed as a redevelopment opportunity. Instead of redeveloping the property into another use, Meridian saw that this would fulfill a need for large medical office tenants, and it was able to secure a tenant for half of the property during escrow.

“As the healthcare industry continues to consolidate, we’re seeing much more demand for larger blocks of contiguous space,” R.J. Sommerdyke, director of acquisitions at Meridian, tells GlobeSt.com. “We felt particularly good about this acquisition because it represented a unique opportunity to provide tenants with one of the only options in the market for large blocks of ground-floor space, which is very desirable from a medical perspective. We’re already seeing our thesis being proven by securing a large tenant so early-on in the process.”

The renovation will be complete late next year, but the early leasing activity bodes well for early lease-up.

“The property was previously operated as an imaging and radiation oncology center,” adds Sommerdyke. “As such, the building housed two linear accelerator vaults, which are used for radiation therapy in cancer patients. These vaults are extremely expensive to construct at $1.5 million to $2 million each, and by having those improvements in place, we can offer a very compelling rental rate to a future tenant who can utilize those improvements versus having to construct them on their own.”

The location will also help to promote leasing activity, and was a major reason why Meridian saw potential in the property.

“Meridian pursued and ultimately purchased the property due to the unique location between two major hospitals and the inherent value in the existing building improvements,” explains Sommerdyke.

While the micro-market is ideal for the medical office project, Torrance in general has improving fundamentals that helped to drive Meridian’s interest in the property.

“In addition to great demographics, the medical office fundamentals for Torrance are strong and continue to improve,” John Pollock, CEO of Meridian, tells GlobeSt.com. “The submarket has consistently experienced positive net absorption since 2010 and market vacancy for medical has dropped to single digits.”

 

Source: GlobeSt.

Innovation In Healthcare Technology Changing the Game For Hospitals And Healthcare Centers

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Innovation in healthcare technology has changed the rules of the game for hospitals and healthcare centers. It has and continues to do so.

As in other industries, healthcare will be disrupted by advancements in technology like telemedicine and virtualized care programs, which are already rising in popularity with patients.

But how will it impact brick-and-mortar space? Panelists at the recent RealShare Healthcare conference here in Scottsdale, AZ, said that telemedicine will not replace the need for office visits. Panelist say it will not take away from the real estate.

“What it will do is create efficiency” according to Justin Brasell, EVP of healthcare advisory services at Transwestern. “We are missing a lot of people due to inefficiencies. We will continue to see more admissions and I think telehealth is also a differentiator.”

He pointed out that when you are a physician that offers telehealth, it is about hook/add for your patient to come back.

“Telehealth will continue to drive occupancy and real estate but it will change what that real estate looks like. It is a great compliment to real estate and supercharge,” Brasell said.

Brasell is hyper focused on standardizing the physician clinic and piping in fiber for additional technology in the space.

“The future is about standardization and flexibility within the new construction developments,” Brasell said.

Jake Dinner, SVP of development at PMB said that if you take a step back from the layout of the space, the strategy behind the clinics really get into the data and determining the right size for the building, what are the service lines and when are they going to come available etc. so you can plan for future growth.

“We try to use data as much as possible. We work with clinical analysts to determine what needs to go into the building paired with telehealth,” Dinner said. “It is about being strategy based.,”

When asked about risk in telemedicine, Dinner doesn’t see the risk in it and says health systems mitigate risk as much as they can.

“The biggest thing with the evolution of telehealth will be education of the providers,” Dinner said. “The place healthcare technology will be most vulnerable will be the patient data for healthcare systems, which are 200 times more likely to get hacked than any other industry. There has been a huge influx in cyber protection and that impacts real estate because it significantly impacts their bottom line and they are looking to the real estate side to help with that.”

 

Soure: GlobeSt

Diagnosing The Net-Lease Medical Sector

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What do dialysis clinics, urgent care locations, and dental offices have in common?

They are often net lease tenants and together these types of tenants make up the net lease medical sector.

Calkain’s just-released “Net Lease Report: Medical Sector” notes that net lease medical properties can prove to be viable investments, thanks to the following fundamentals.

In-Place Tenants

The main appeal of a net lease medical property is the tenants, which funnel capital into extensive space buildouts and industry-specific equipment. Furthermore, a net lease medical tenant is less likely to up and relocate, as moving X-ray machines, dental equipment and surgical suites can be a costly challenge.

In-Person Healthcare Delivery

Even with telemedicine and virtual healthcare becoming important tools, medical care continues to flourish through face-to-face interaction. The in-person, real-time relationship between patient and physician is difficult to replicate via the internet, meaning a continued need for physical space. Additionally, medical tenants set up shop in specific areas, based on proximity to target populations and lack of competition.

Financial Strength

Net lease medical tenants range from solo dental practices to regional stand-alone urgent care/emergency centers to national specialty clinics. Another aspect tying these businesses together is they are, for the most part, strong financially. A consistent revenue stream adds to the appeal of a net lease medical property.

As with any kind of investment, there are downsides. The net lease medical sector is no exception, and investors need to keep in mind the following.

Empty Space

As mentioned above, relocation is less likely to take place, but this doesn’t mean that it won’t happen. If a healthcare tenant decides not to renew a lease, backfilling the property can be difficult and tenant improvements to convert to general retail purposes can be costly.

Shifting Dynamics

Neighbors Legacy Holdings Inc., which owned and operated Neighbors Emergency Centers, filed for Chapter 11 bankruptcy protection in summer 2018. The year before, six urgent care centers in Southern California filed for bankruptcy protection. Increased competition, changing third-party payer conditions, and increasing overhead costs created financial difficulties for these and other companies. The bankruptcy process can kill a net lease investor’s revenue stream until a judge approves a reorganization plan.

Certainly, there are risks when it comes to owning a net lease medical property and due diligence is essential. The future is bright for the sector.  With advances in medicine, people are living longer and this creates a greater need for healthcare services. The growing demand could push net leased medical facilities to full capacity and lead to a need for additional medical offices, specialty clinics, and urgent care locations. As such, market fundamentals and increasing demand can make medical-sector properties attractive to a net lease property owner.

 

Source: GlobeSt.