Medical Office Development Ramping Up Ahead of Changes Under Affordable Care Act

Expected Changes Under Obamacare Altering Space Requirements of Health Care Providers, Both On and Off the Hospital Campus

Developers are finally ready to move forward on numerous medical office building (MOB) development projects as the new era of retail medicine begins under the new Affordable Care Act, despite early problems that have temporarily put the Obamacare registration web site out of commission.

Heightened demand for modern and more efficient outpatient medical office space is generating an uptick in both ground-up development and renovation of existing buildings. In some cases, health care providers are even repurposing vacant retail space in malls and shopping centers, according to Newmark Grubb Knight Frank’s most recent Healthcare Real Estate Outlook.

Medical office brokers have reported a recent increase in RFPs for health-care real estate projects as vacancies in higher quality 4 and 5 Star medical office space has fallen from about 11.5% in late 2009 to 10.5% as of third-quarter 2013, according to CoStar data, and more than 8.23 million square feet of new medical office space is under construction.

“We’ll see an increase in in the pace of MOB and clinic development all the way through 2014,” said Garth Hogan, executive managing director of global healthcare services for NGKF. “Where the health systems can find land, they’ll build and where they can’t, they’re repurposing retail, a new trend we’re seeing this past year.”

For example, MemorialCare Medical Group opened a new primary care, specialty care and urgent care center in a converted Borders bookstore earlier this year in the Los Altos MarketCenter in Long Beach, CA. The two-story, 30,000-square-foot clinic will serve as a “one-stop-shop” for Los Altos area families, MemorialCare said.

In another case of retail recycling, Kaiser Permanente in January will open a 32,000-square-foot medical office building in East Portland, OR, at the site of a store formerly occupied by the now-defunct Circuit City electronics chain.

Regional retail centers are typically well located, have excellent name recognition, good access and ample parking. The open layout and 20,000- to 40,000-square-foot of such empty retail spaces is compatible with clinical space, Hogan said.

“It’s a perfect fit as the health systems become more competitive and try to place these clinics in the community,” he said.

Among the new development projects poised to begin is the 236-acre March Lifecare Campus in Riverside, CA, slated for 3.5 million square feet, which ranks it as one of the largest health-care developments in the country.

“Contractors, architects and providers are all hovering over the [March Lifecare] project right now. Health systems across the country are signing big leases, and construction will start on those projects over the next year,” said Hogan, who is marketing the project.

March Lifecare exemplifies a new trend in health care development expected to pick up momentum under the ACA, which provides incentives for providers to centralize patient continuum of care in one location.

The facility will eventually include a hospital, medical office space, retail, restaurants, senior care, skilled nursing, short and long term acute care, hospice, ambulatory surgery and even a hotel, all in single master-planned campus. Increasingly, developers are incorporating retail, lodging and senior residential uses into these large health-care developments.

Hogan said three different health systems are now in negotiations to build the hospital, and several skilled nursing operators are also vying for space in the March project, which appeared to be treading water as recently as last year.


Medical Industry To Benefit from Continued Growth

“There’s a lot of pent-up development activity for ambulatory facilities by third-party developers on behalf of hospitals, including clinic space, medical office and ambulatory surgery centers,” said Jeff Cooper, executive managing director at Savills.

Based on extensive conversations with national health care developers, Cooper estimates the level of development activity has increased 50% in the first three quarters of 2013 over the same period in 2012.

“Last year, developers were complaining about a lack of RFPs for new facilities. This year, the only complaining is about the need to prepare responses to all the RFPs that have come out,” said Cooper.

The boost in development proposals reflects both improving economic conditions where hospitals feel more comfortable spending on capital improvements; and because hospitals need to pursue an ambulatory care strategy, or risk losing patients to competing institutions, Cooper added.

“We have much more clarity now, and everyone realizes 2014 is coming up fast,” Cooper said.

Under the ACA’s new reimbursement models, Medicare accountable care organizations (ACOs), which are network of hospitals and providers that contract with Medicare and Medicaid to provide care to large blocks of patients, will pool services under a single-service provider. Those services must be centralized in an ambulatory care rather than an in-patient hospital setting.

“Very often, hospitals are in urban locations where parking is difficult and patients may have to travel far, so providers are looking to move a lot of their ambulatory clinic space, such as urgent care clinics and surgical care centers, away from the hospital campus into a hub and spoke format,” Cooper said.

Source: CoStar Randyl Drummer November 6, 2013
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