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Healthcare Is Entering A New Era Of Medical Office Development

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Meridian CEO John Pollock uses three words to describe the biggest trend in healthcare real estate at the moment: outpatient, outpatient, outpatient.

“As healthcare enters a new era, companies providing more outpatient services are on an upswing,” Pollock said. “We are in an era of tremendous growth in outpatient services,” Pollock wrote in an email to Bisnow. “In fact, we are so sure that outpatient services is where the industry is headed that this sector is nearly our singular focus at Meridian. I believe that as healthcare systems provide more care in a lower acuity setting, they will be able to provide a better experience for patients and at a lower price.”

Healthcare is undergoing a tremendous transformation. Healthcare is adjusting, evolving and growing rapidly as baby boomers continue to retire, millennials and Generation Z mature, and technology continues to shape the healthcare space.

“Now more than ever, bigger players and more money — especially from institutional investors — are entering the industry, CBRE First Vice President Angie Weber said. “These large providers have really taken over and the independent physician has become a thing of the past,”

Weber and Pollock are speaking at Bisnow’s National Healthcare West event June 20. Because of the growing population and the fact that most everyone at one time or another gets sick, healthcare is seen as a safe and resilient investment.

“It’s very safe and strong,” Weber said. “But it’s very expensive. The cost of managing staff and patients, tenant improvements and construction are very high.”

Outpatient demand is driving the development of medical office buildings greater than 150K SF, according to a JLL report released in May.

“No area of growth in healthcare is higher than outpatient services,” Pollock said.

There are currently 44 medical office developments larger than 150K SF under construction in the U.S., according to the report. The projects, estimated at $5.3B worth of investment, total nearly 11M SF and represent 22% of all medical office projects underway, the report states. Of the 44 projects, five are 450K SF or more, one is in the 350K SF to 449K SF range, eight are 250K SF to 349K SF, nine are 200K SF to 349K SF and 21 developments are 150K SF to 199K SF.

“This new trend is a function of the well-recognized growth in outpatient care with its focus on the patient experience and physician convenience with critical services and specialties housed under one roof, with the added goal of accountable care in a lower cost setting,” the report states. “The timing couldn’t be better given the surge in capital seeking investment opportunities in healthcare given the quality of tenancy and durability of medical office properties.”

Weber said the outpatient trend is being driven by a combination of demands from patients and medical providers. Many people, especially millennials, don’t like visiting a hospital for treatment.   Medical providers also find that it costs more to do certain medical procedures in a hospital than an outpatient setting.

“Along with preventive care options, medical providers are opening more specialized healthcare facilities, such as those that offer treatment for depression or post traumatic stress disorder and behavioral and mental health facilities,” Weber said.  “We’re going to see more of that,” she said. “I think you’re going to see these outpatient clinics in all shapes and sizes.”

 

Source: Bisnow

Growth In Outpatient Demand Drives A Surprising Number Of Buildings Greater Than 150,000 Sq. Ft.

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With the opening this month of the 10-story, 250,000 square foot MOB at the new Sutter Health CPMC campus in San Francisco, the market is heralding a new era of large format medical office development with building size over 150,000 square feet.

This new trend is a function of the well-recognized growth in outpatient care with its focus on the patient experience and physician convenience with critical services and specialties housed under one roof, with the added goal of accountable care in a lower cost setting. The timing couldn’t be better given the surge in capital seeking investment opportunities in healthcare given the quality of tenancy and durability of medical office properties.

There are currently 44 medical office development projects larger than 150,000 square feet under construction in the United States, a total of 10.9 million square feet, representing 22% of all medical office projects underway. In aggregate, the large format projects represent $5.3 billion of investment or $480 per square foot. Six developments alone are over 400,000 square feet and the ten largest projects have a total budget of $2.3 billion. JLL estimates that the mark-to-market valuation of these projects, once completed, is $7.8 billion.

The largest medical office development under construction and near completion is located on the Upper East Side in Manhattan – the 750,000 square foot, David H. Koch Center for Cancer Care. Interestingly, two of the top four largest medical office developments are located in New York City. Over forty percent of the active development projects larger than 150,000 square feet are located in the Northeast and Mid-Atlantic regions. The Southeast is the least active region with only one project under construction that’s larger than 150,000 square feet.

Providers dominate the ownership of the 44 projects. Only 10 buildings, representing approximately 20% of the square footage, are owned by third party investors. However, the surge in large format outpatient buildings and the staggering scale of capital required to support these developments is an encouraging sign for institutional real estate investors as the capital intensive business of healthcare is expected to eventually turn to real estate investors to augment health system access to bond markets and philanthropy.

 

Source: HREI

The Top Markets for Medical Office Buildings

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The medical office building sector is considered one of the safest in commercial real estate investments due to, among other factors, a national trend to lower healthcare property operating costs.

“MOBs are a lot more efficient to run, cheaper to operate and are usually leased on a triple net basis which is attractive to investors,” Rodman Schley, senior managing director of BBG tells GlobeSt.com.

According to a recently released report by BBG, between 2005 to 2016 MOBs rose by approximately 50% to about 41,000 nationwide.

“Houston, Minneapolis/St. Paul, Boston, Atlanta and Chicago have the largest concentration of MOB construction projects. Nationally, the MOB market accounted for an estimated 22 million square feet in 2018,” Schley says.

The Dallas/Fort Worth area had the nation’s highest number of MOB construction completions from the third quarter of 2017 to the second quarter in 2018, according to the report.

“The region had nearly one million square feet of medical office space added during this period,” Schley tells GlobeSt.com.

Besides lower operating costs, the increased demand for medical office buildings can be attributed to growing investor interest, convenience and technology, the overall pursuit of a healthier lifestyle, changes in reimbursement and regulations and the aging population’s need for medical care.

The average asking rental price for MOBs rose to nearly $23 per square foot, a 1.4% increase year-to-year. This is due to an increasing demand for the limited supplies of high quality, newly constructed, medical office space and other outpatient facilities.

“The rate of construction and the renovation of MOBs will continue growing,” predicts Schley. “It’s definitely a strong MOB market. We have a lot of baby boomers and they have medical needs. We’ve also become much more health conscious as a society. We are certainly not at an over saturation point in the MOB sector.”

 

Source: GlobeSt.