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Medical Office Buildings, The Perfect Storm!

by Karen Margrave on March 21, 2013 · 10 comments

  
Medical Office Building

Owning a family run real estate development company, we always keep our eye on the where we believe the current market is; and what market niche we believe has potential for long-term growth.  Since the crash of the market, we, much like many of you, are more cautious than in the past; and have been doing our homework. We’ve come to the conclusion that we want to invest our money; and time into developing medical office buildings, and this is why:

MEDICAL OFFICE BUILDINGS

Best Location + High Demand – Low Supply = Financial Opportunity

  • BABY BOOMERS – There are 10,000 baby boomers reaching age 65 each and every day, and that will continue for the next 17 years. The aging of the Boomers, coupled with the latest medical technology to improve the quality of their lives (hip and knee replacements, organ transplants, cosmetic surgeries, etc.) along with their subsequent rehab, and outpatient services, will create even more demand for medical care. The children of the Boomers, dubbed the Echo Generation, have had children, Generation X, that participate in extreme sports, which by their nature cause many more injuries, and thus a growing number of medical practices devoted to rehab, sports medicine, and nutrition.
  • AFFORDABLE CARE ACT - The advent of the ACA will put even more people into the market for healthcare and preventative care, resulting in a high demand for medical office space. The Congressional Budget Office estimates that by 2016 an additional 32 million patients will have health insurance coverage.
  • CHANGE IN SERVICES - Procedures that were once traditionally performed in hospitals, such as surgery, have been moving to outpatient surgery centers, specialty centers (robotics, cosmetic surgery, ophthalmology, walk in clinics, etc.)

In a recent article in Amednews.com, it was stated that a 2010 Medical Office Report prepared for Marcus &  Millichap, senior analyst Thomas Hershey estimated that nearly 45 million more square feet of medical office space will be needed if 50% of the 46 million uninsured individuals attain coverage through the health care system.

It is estimated that in order to accommodate those in the 55+ age group, by the end of 2013, an additional 25 million square feet of space is needed. In 2009 Medical Office sales were $1.8 billion dollars. In 2010 that number rose to $3.9 billion dollars.

LOCATION:  Physicians are increasingly attracted to medical office space on or very near hospital campuses in order to leverage hospital services; and increase traffic to their private practices. Additionally some physicians are affiliated with those hospital systems; and require proximity to their campus. The limited number of properties for sale or lease in these areas create significant investment opportunities for commercial real estate investors.

As the Baby Boomers age, they are increasingly relocating to “Sunbelt” states, such as California, Florida, Arizona, and other states that have mild year round climates, and allow an active lifestyle.  Adding to that trend, are growing families that seek out those same areas due to the abundance of educational offerings, strong business climates, health care services, cultural venues, sporting events, etc., and the overall outlook for health care services in those places will remain strong for years to come.

Though as developers we are confident that there is a good market for medical office space, and in fact are developing a medical office building in southern California, this article is based on our personal assumptions of the market. This blog is in no way meant to encourage anyone else to invest in medical office space. Real estate investing can reap large rewards, but carries with it much risk; and we encourage you to seek the advice of your broker, accountant; and attorney’s before venturing into buying or investing in medical office buildings, or any other investments.

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{ 10 comments… read them below or add one }

Jeff Brown March 21, 2013 at 12:16 pm

First of all, welcome to BP, Karen.

Do you give much credence to reports predicting more physicians retiring early, therefore reducing the supply of needed medical expertise at an alarmingly increasing velocity? Are those stats backed by reliable data? Thanks

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Joshua March 21, 2013 at 12:22 pm

Let’s not forget the effect Obama-Care is going to have on the medical field as well!

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Karen Margrave March 21, 2013 at 12:43 pm

Jeff – Thanks for the welcome. This is my first blog as a regular, I’ve written a few others on development, as a member blogger.

As for physicians retiring early, that may be true. However; all of us have probably experienced more P.A.’s and R.N.s taking on many of the duties of physicians to help ease the burden on doctors. Also, though in America there are fewer students in medical school, many of our physicians come from other countries. Add to that hospitals taking on more long term care of the elderly, and offering more services. All of that will add to the need for more office space for practices, and hospitals off their campuses.

As for the stats… you don’t trust the CBO? LOL. Seriously though if you research it, you’ll find many studies done on medical office space etc., and the conclusions generally are the demand will outpace supply.

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Jeff Brown March 21, 2013 at 12:48 pm

Thanks Karen, you make sense. Nothin’ like empirical data.

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Sharon Vornholt March 21, 2013 at 3:56 pm

Karen -

I can certainly see that this is something for commercial imvestors to take a good look at. It’s good to have someone writing about commercial investing. Welcome to BP as a regular blogger.

Sharon

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Steven Browne March 21, 2013 at 8:46 pm

I know several plastic surgeon and ophthalmologists in Los Angeles as clients. Medical is the way to go. Even if a surgeon is only clearing 20% profit due to overhead, insurance, etc, is still pays for itself. Many M.D.s are getting into commercial properties as indeed, the time is right.

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Karen Margrave March 22, 2013 at 12:57 am

Steven, one thing is certain, people will continue to get sick and be injured no matter what the economy is doing. Aside from that, the Baby Boomers have driven the market for their entire lives. Whatever life stage Boomers are in, you want to be in a market that provides service to them.

As I’m sure you know, vacant land on which to build new projects in southern California is hard to come by, whether for residential or commercial. Vacant land close to a hospital is even more rare. Southern California has a pretty healthy market, and I see prices rising everyday, no matter what niche you’re in.

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Jane Underwood May 4, 2013 at 11:01 am

Karen, you are undoubtedly familiar with the wealthy retiree demographic of Southern California and medical facility real estate niche. Renting out office space in prime locations sounds like a profitable enterprise yet, do managed care plans need to be factored in? My years of experience as a hospital-based clinical nurse have provided some understanding of how physicians operate in private practice. I am seeing more patients channeled into managed care plans where they are followed in the community by a physician in the same group as the hospitalist assigned to orchestrate their care in the hospital. The same healthcare organization owns and operates the medical office buildings as well as the affiliated urgent care centers. Sharp Rees-Stealy is one example. Kaiser Permanente would be another. I am currently under the care of an orthopedic surgeon assigned to me by my managed care primary physician. His office is within the campus of the main hospital. Would it be realistic to envision attracting more independent practitioners to private office spaces in a facility owned by a real estate investor such as you or I? My question is, what would be the best method to assess demand for private medical office space? Is it reasonable to assume that practitioners with established practices in less-than-ideal locations could be enticed to relocate? Acquiring a prime plot of land, obtaining permits and financing new construction would be only the first major hurdle. Renting out all the office space to pay off the mortgage and generate positive cash flow would be the other. Even one empty suite could be financially devastating.

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Karen Margrave May 5, 2013 at 1:21 am

I can only speak to my experience. Right now we are in the process of developing a medical office building in Fullerton, CA, just down the street from St. Jude’s Medical Center. The lot we purchased was the only lot available for sale in the area, meaning there is no place else right now where a physician wanting their own space can purchase. We have interest from physicians considering purchasing the building, and other considering condo space.

Though St. Jude does own several buildings in the area, in which they lease space to physicians, there are many privately owned buildings that are leased to physicians and other medical professionals. Add to that the ever changing landscape of medical care, and I am confident that the market will grow, not shrink. In fact, many studies show that the demand for medical office space will far outpace supply in the years ahead.

Of course, as with all real estate investments, it’s necessary to research the specific market, understand the issues that affect it, and buy or sell accordingly.

I hope I have answered your questions. Please feel free to leave more comments.

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arthur cecchini February 1, 2014 at 7:30 pm

im a nurse practitioner in eastern ky (which is several years behind times) and i have a few friends who are also nurse practitioners who are looking to get into the medical facility business. we plan on starting our own clinic for weightless and urgent care. most doctors in my area are foreign and don’t understand anything about business, opens lots of doors

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