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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

Investor Demand For Medical Office Buildings Has Gone Global

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Demand for medical office properties is so strong, even foreign investors alien to the American healthcare system are shopping for them

“Investors from Singapore and Australia are shifting capital to the U.S. to invest in medical real estate,” CBRE Vice Chairman Lee Asher said during Bisnow’s Atlanta State of Healthcare event last week.

But as they come, Asher said he is spending more time educating foreign investors on the ins and outs of the American healthcare system.

“The foreign capital, it takes them about two years to understand how healthcare works in the U.S.,” Asher said. “There’s plenty of new capital, but the key is they need domestic operating players.”

Asher was among medical real estate experts at the event who discussed a wide range of topics affecting the industry, from the surge of new medical office construction and the merger mania occurring within the healthcare industry to the effects of the possible dismantling of Georgia’s certificate of need system.

Of course, foreign players are only a portion of the investors seeking stakes in medical office real estate. But increasing revenues, merger and acquisition activity and overall health system growth has been attracting investors from Asia, Europe, the Middle East and even Africa and Latin America, Modern Healthcare recently reported.

According to a 2019 Marcus & Millichap report, medical office sales had their largest growth in transaction velocity, at 13%, since 2015, nearly double the rate compared to other commercial property investments.

“Hospital-affiliated facilities and outpatient surgery centers with long leases and annual rent increases are most desirable, with initial returns ranging in the mid-5% to 7% span,” Marcus & Millichap officials said in the report.

Part of medical office’s attraction is its stability. Panelists said during the Great Recession, those investments largely remained untouched by the overall real estate malaise. Investors today see the sector as one of the best to weather economic downturns, especially as baby boomers age and require more healthcare.

“Also, many of the tenants — especially tenants with lots of medical equipment, like imaging groups or cancer treatment centers — book long leases and rarely, if ever, undergo the headaches of a relocation,” MB Real Estate Services Senior Vice President Brian Burks said.

Ackerman & Co. President Kris Miller said when his firm first started to develop medical office campuses more than two decades ago, it required a significant amount of personal capital and hard work to find investors. Today, the story is completely different.

“We all know racetracks make money, but it’s hard to find a banker who is going to finance one, and that was true with medical office,” Miller said. “There are just so many people who want to buy this right now. We can sell every medical office asset we stabilize, and we can sell that asset 10 times at roughly the same price.”

“Construction costs are complicating the growth of physicians and hospital groups. Even with developers willing to capitalize and build new medical facilities for tenants, the groups still need to have the financial wherewithal to handle the higher rents,” HealthAmerica Realty Group CEO Tommy Tift said. “That is probably our biggest challenge, and also that will be physicians’ … biggest challenge.”

 

Source: Bisnow

Dallas-Fort Worth Tops The Nation In Medical Office Building Development

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Dallas-Fort Worth (DFW) had the nation’s highest rate of medical office building (MOB) completions from Q3 2017 to Q2 2018, according to a new report from CBRE.

MOB construction deliveries totaled 954K SF during that period, with another 95K SF of medical space still under construction as of the last half of 2018.mob

“Even development that robust doesn’t add up to overbuilding, at least not yet,” according to CBRE Senior Vice President, Global Workplace Solutions Jordan Buis. “Although we’ve seen growth in DFW healthcare developments over the past decade, I believe the market is stable. We’ve seen healthy demand from tenants to keep up with the new supply, and developers aren’t overbuilding. The population boom in DFW is driving the need for new medical product, especially in the suburbs.”

The recent volume of deliveries continues a longer-term pattern of growth for the Metroplex, the report said. From Q1 2010 to Q2 2018, DFW delivered more than 2.7M SF of new medical office space, second only to the Houston market, which delivered in excess of 3.5M SF of MOB space in the same period.  Medical office rents in the Metroplex increased 2.1% from Q2 2017 to Q2 2018 to $27.43/SF, even as the vacancy rate rose 180 basis points to 23.3% over the same period.

“As rents continue to rise and reimbursements continue to decline for the healthcare providers, it will be interesting to see if there’s a point of inflection in the near future,” Buis said.

The surge of MOB development in the Metroplex comes as health systems nationally are increasingly turning to outpatient centers due to higher capital costs and a surge in high-deductible health plans requiring patients to pay larger out-of-pocket amounts.

The total number of outpatient centers nationwide grew more than 50% from 2005 to 2016 to about 41,000 properties, according to CBRE. Outpatient center employment has more than doubled since 2003, and grew 3.5% year over year in October 2018, compared with 2% annual growth in overall healthcare employment.

Medical City Frisco Expansion (PHOTO CREDIT: Medical City Frisco)

In DFW, the most recent example of outpatient development — though close to a traditional hospital — just broke ground at Medical City Frisco.   The facility will be a medical office building with an ambulatory surgery center totaling about 150K SF and connected to Medical City‘s main hospital by a skybridge. The development will include 11 operating rooms, 53 patient rooms and office space. The $37M project is expected to be complete by spring 2020,”

“The development is anticipating future demand for leading-edge medical treatment,” Medical City CEO Charles Gressle said in a statement.

Last year, the hospital expanded its women’s services unit, which includes 13 delivery and recovery rooms, and features a six-bed, Level II neonatal intensive care unit with three dedicated cesarean section operating rooms.

 

Source: Bisnow