Healthcare commercial real-estate is a unique, subspecialized segment of the entire commercial real-estate industry. According to NAIOP Research Foundation, U.S. nonresidential construction spending in 2016 totaled $455.3 billion. Of this, approximately $41.4 billion (~9%) was spend on healthcare construction.
Strong demand from an aging population in setting of industry consolidation continues to propel the construction of large, consumer-friendly patient care facilities. Colliers International states that in 2016, over 22 million square feet of new healthcare commercial space was delivered, following 14.6 million square feet of deliveries in 2015. Despite a robust supply of new healthcare commercial office space, national vacancy rates, according to Colliers, continue to hit all time lows (7.4% at year-end 2016) with full service gross rents rising by almost 8%.
To better understand these trends, Clineeds, a free online platform designed to connect commercial brokers with healthcare professionals looking for office space, conducted a survey of its users consisting of healthcare professionals, hospital executives, and commercial brokers specializing in healthcare real estate. Over 79 commercial brokers along with 85 healthcare professionals/executives responded either partially or fully to the survey request and provided commentary on several questions.
“As a healthcare real estate tech platform, it’s important for us to understand the trends in the industry,” said Clineed co-founder Rishi Garg. “How are these trends impacting future decisions to construct, purchase or lease commercial office space?”
Here are the results, summarized below:
Retail clinics are on the rise. Cost-effective, convenient care provided at retail clinics has struck a chord with millennials. In an effort to capture this market, healthcare organizations have begun to partner and lease space within traditional retail outlets in lieu of purchasing offices. These leases, unlike traditional commercial leases, are faced with regulations regarding proper use, zoning, biohazard and medical waste. Also at play are issues regarding Starks Law and other anti-kickback regulations, often requiring the additional expertise of a healthcare lawyer.
Commercial office space close to hospitals retain value. Healthcare professionals continue to face declining reimbursement from insurers and government healthcare programs. This has indirectly impacted rent rates of commercial offices near hospitals.
To make up for lost income, physicians have substantially increased their productivity by adding new patients and extending office hours. Medical providers, especially surgeons, overwhelmingly stated they would prefer to rent an office near a hospital and not waste time commuting. As a result, commercial office space near hospitals continue to retain significant value. According to some brokers, in certain areas of New York City and San Francisco, rent may even exceed that of Class A commercial office space. For this reason, hospital executives continue to show a strong willingness to construct commercial space near their facilities with the added benefit of making making millions from services ordered by an affiliate physician. Large healthcare real estate investment trusts (REITs) have also shown a willingness to purchase large offices near medical campuses and hospitals given above market rent rates. Unfortunately, given the size of most transactions, small investors remain outmatched in this market.
Conversions costs remain significant barrier to supply. Transitioning a commercial real estate office to healthcare space are fraught with challenges. This has limited supply of these offices in certain markets. Aside from the myriad of regulations, the build out costs for many physician and dental offices remain significant. Owners and operators of large commercial buildings are hesitant to invest in such projects given the everchanging healthcare landscape.
What’s in store for 2018?
Recently in an article titled The U.S. Medical Office Market Could Be Heading For A Bubble, David Park, senior SVP of Construction Novant Health, raises the concern of a potential bubble in healthcare commercial market due to a “population lull and changing technology.” Although most respondents failed to agree or disagree with that statement, a resounding concern exist about the impact changes to the ACA (Affordable Care Act) may have on yearly budgets. Short term, many hospital executives stated they may have to re-evaluate FY 2018-2019 capital expenditures, depending upon the costs of implementing new regulations and potentially lost revenue from changes to the ACA.
Although this may disrupt upcoming projects, long-term healthcare executives and commercial brokers continue to remain optimistic and bullish.
“Healthcare real estate is a unique subset of the commercial real estate market, influenced by factors beyond supply and demand. It’s essential that medical professionals partner with brokers knowledgeable in this field, and use specialized data to help them make smart leasing and construction decisions,” added Garg.