Developments
both inside and outside the healthcare industry are shaping the future of
medical real estate and several trends are emerging. We continue to see a
flight to quality within the medical office market as practices seek to upgrade
facilities and increase efficiency. The healthcare industry is working to meet
the demand of a rapidly changing environment and companies are getting creative
and more resourceful.
Healthcare
practitioners readily anticipate the significant increase in demand for medical
services expected over the next decade. Shifting demographics and new heath
care legislation are expected to expand the patient base. As a result, job
creation in the healthcare field is expected
to mirror the increased demand. In response to the anticipated industry growth,
the Urban Land Institute estimates the demand for medical office buildings
(MOBs) will increase 19 percent by 2019. The recent spike in demand for quality
medical space is indicative of that trend.
Consolidation
While health
care real estate is subject to the broad economic factors that affect the
commercial real estate market as a whole, it also feels the effects of ever
increasing levels of regulatory compliance. The Patient Protection and Affordable
Care Act (PPACA) requires hospitals and
practitioners to invest significantly in the implementation of many new systems
and procedures. The cost associated with the move to electronic medical records
(EMR) alone has led many physicians to seek the security of larger hospital
systems that are able to help absorb the cost and coordinate the transition.
Consolidation
of health care providers is arguably the most influential trend in the medical
real estate market. Fueled by the low cost of capital, larger healthcare systems
are being created via mergers, acquisitions and strategic partnerships. Competition
for market share along with the increase in the number of insured individuals
should keep demand for medical office property on a steady rise for the next
several years.
Repurposing and New Opportunities
As demand
for medical real estate grows, many of the larger providers will find space is
limited. In infill markets such as Orange County, we expect to see a shift
toward repurposing of existing buildings, including office, industrial and
large retail. Repurposing allows health care systems to speed time to market at
a lower cost than building a new facility.
In a related
theme, non-medical real estate properties have seen an influx of medical
activity over the last few years. Individual physicians as well as
hospital-affiliated practices have discovered the benefits of well-situated
retail centers. These smaller spaces provide a cost effective option for health
care users looking to take advantage of the visibility, lower lease rates and
high parking ratios generally associated with retail product. Retail locations
offer patients convenient access, build brand awareness and also help drive
more patients to larger operations. Established practices have also found relief
from the higher cost of medical real estate by leasing in strategically located
office product.
Trends going
forward will vary by region and state. In Orange County, we expect to see lease
rates stabilize and recover as vacancy continues to decline. Landlords are
already cutting back on tenant improvements allowances and rent abatement, both
of which are precursors to rising lease rates.
Physicians find themselves struggling to make tough decisions. Many want
to remain flexible in their leases while they navigate a changing environment,
but the chance to lock in a low lease rate with an attractive tenant
improvement package offered on longer leases is just as tempting.
The changing leasing environment presents a new
set of challenges to physicians and real estate brokers alike. It is prudent to
have all lease documents reviewed by an attorney familiar with healthcare to
ensure compliance with state and federal laws anti-kickback statutes. For more
information please see here.
Submitted by Stacey Hall on behalf of Lee & Associates Commercial Real Estate Services, Inc. as a guest post.