As brick-and-mortar retailers continue to be squeezed out by Amazon and its online competitors, shopping center owners are continuously looking for creative solutions to their anchor tenant problems. While major grocery chains, movie theatres, restaurants, tech companies, and condos are being regularly implemented into the multi-use shopping center trend, health-care is the latest big tenant option to emerge. The health-care industry is moving away from centralized campuses to bring services closer to patients at a time when two key demographics – boomers and millennials – are entering prime years for consumption. For the health-care companies, softness in the retail market has helped them negotiate favorable leases, including improvement allowances. Medical facilities also look good financially as tenants, with credit profiles that stack up well compared with nail salons and fast-food restaurants.
While medical office buildings will continue to post strong occupancy stats into the New Year, industry executives are concerned the volatility in the health care sector, stemming from the Affordable Care Act aftermath, changes in technology and hospital consolidation, will keep growth and transactions low. Health systems have been looking more to retail centers to build new medical office building (MOB) projects in an effort to reach an expanding consumer base and make access to care more convenient, and there has been no shortage of investor demand and construction activity. In fact, every state experienced active medical real estate construction in 2015, according to research firm Revista. There was more than $86 billion in new construction in the first half of last year alone, much of which centered on MOB projects.
In anticipation of an expected boom in new patients, some traditional hospital systems are shifting their expansion strategy toward mixed-use 'mini-districts,' bringing shopping, apartments, and hotels to hospital campuses. According to CoStar Group, nearly $100 billion in construction of new and expanded hospital medical office projects, both on and off the hospital campus, is under way across the U.S. In the current building boom, developers are as likely to be adding apartments, retail space and even hotels as more patient care facilities.
The physician real estate market is dynamic and diverse in the United States due to unique local, state, and federal healthcare regulations significantly impacting the size, type, and location of outpatient healthcare. While the product type/location varies widely in healthcare real estate, two major influences are affecting physician real estate decisions, according to the BDC Network. Prior to 1989, and federal Stark Laws, the real estate market for medical space evolved almost entirely from a campus-based environment. Providers were offered lucrative lease terms to keep them close and hospital admissions high. However, with Anti-Kickback Laws and the Affordable Care Act (ACA) now controlling the market, even the most sophisticated practices are presented with new challenges.
Driven by the residential, retail, industrial and health care facility sectors, the South Florida metropolitan area had the second-most construction contracts awarded in the first half of 2015. According to Dodge Data & Analytics, the tri-county area had $2.96 billion in commercial and multifamily construction starts, behind only New York with a massive $17.3 billion. South Florida had more construction than larger metro areas such as Los Angeles, Houston, Dallas, Chicago and Washington, D.C. Improving market fundamentals, such as occupancies and rents, helped support the growth for commercial and multifamily construction.
A study conducted by the Pennsylvania Auditor General found Allegheny County as the top county in terms of losing the most annual tax revenue from exempt real estate. According to the Pittsburgh Business Times, "the Auditor General's review estimates that Allegheny County loses $619.7 million in real estate tax proceeds each year due to tax-exempt property, well over one-third of the more than $1.5 billion total lost by the 10 counties included in the research."
By Mark Yost, Senior Managing Consultant, Detroit
Due to its traditionally lower vacancies and higher rents, the medical office market has generated investors' interest over the past decade like never before. According to GlobeSt.com, medical and dental tenants tend to be stable, credit worthy, and move less frequently than office tenants due to patient referral patterns and long-term patient relationships which are carefully developed over time. In fact, the vacancy rate among medical office buildings nationwide is generally half that of regular office buildings at about 5-7%.
Healthcare reform is revising the traditional medical office models and moving away from solo practitioners and single-specialty practices in small offices. According to GlobeSt.com, aging facilities and a move towards managed-care systems for the past two decades have caused consumers to pay more attention to the location and condition of the facilities they use for healthcare. This led to joint-ventures with hospitals for new campuses and for refurbishing existing facilities to become the norm.
Cash-strapped Illinois is facing $10 million a year in lost revenue caused by a tax-break for investor-owned hospitals. According to the Daily Herald, hospital industry officials say the tax credit recognizes the free care they provide to the uninsured, but some state officials were puzzled about how for-profit hospitals were able to land a major tax break in the intense closed-door negotiations during a statewide financial crisis.