New Demand for Medical Office Space is on the Horizon

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There could be a boom in medical real estate on the tails of healthcare reform.

The “Commercial Real Estate Show” talked with experts in healthcare and medical real estate for an overview of this market and some great strategies and tips for both tenants and landlords. The show also featured a legal expert to address the potential effects of healthcare reform.

Speculation ran wild during the debate over healthcare reform that adding so many new patients into the ranks of the insured could fuel demand for 60 million square feet of new medical office space. Now estimates are much more conservative, but still significant.

“They don’t necessarily feel that it will create demand for 60 million square feet of new space — but even if it’s half or a third of that — and with the new products that the systems are going to need, it’s kind of an exciting time for development firms,” said John Mugford, senior editor of Healthcare Real Estate Insights.

But there is still uncertainty about healthcare reform, as many states have filed lawsuits claiming the new federal laws are unconstitutional.

The two most prominent cases have gone to the Court of Appeals and are expected to reach the U.S. Supreme Court, said Victor Moldovan, a partner at McGuireWoods LLP who represents a wide variety of healthcare clients.

The clock is ticking since the major part of healthcare reform — mandatory insurance — is supposed to go into effect in 2013 or 2014.

“Everyone is hopeful that these cases get resolved one way or the other before that date because you want to have some stability in the marketplace,” Moldovan said.

Meanwhile, investors are increasingly interested in medical office buildings, agreed experts on the show. And sales volumes are rising.

Paul Zeman

Sales volumes of medical office buildings reached $2.9 billion in 2010, compared to $1.6 billion in 2009, said Paul Zeman, senior vice president of healthcare real estate services at Bull Realty Inc.

Cap rates are between 7 percent and 8 percent, depending on length of leases, the quality of the tenants and several other factors, Zeman said.

“We have a lot of all-cash buyers that are really faced with needing to deploy capital and that has in fact, compressed cap rates,” Zeman said.

It’s still a good time to be a tenant. Medical tenants are typically looked upon very favorably by landlords, giving medical practices an extra edge in already tenant-friendly times.

Leo Griffin

Experts say tenants should start weighing their options at least six months before they have to give notice on a lease renewal. They should review their current lease, think about their future growth and start shopping around, said Leo Griffin, vice president of healthcare real estate services at Bull Realty Inc. They also should consider buying a property.

“If you don’t solicit at least three proposals for pricing, you’re not seeing how the market has changed, what the competitive nature is and how can you reduce your cost  — even in the building you’re staying in,” Griffin said.

As for landlords, they can deploy creative marketing strategies like videos and social gatherings, as well try offering a percentage ownership to tenants.

This show provided a very interesting look at healthcare and medical real estate, as well as the effects of healthcare reform. If you haven’t heard it already, the show is available for download here.

Michael Bull, CCIM
Show Host, Commercial Real Estate Show

President, Bull Realty, Inc
800-408-2855 ext 2001