Evolving Medical Office Market has Major Implications for Real Estate

Farbman Group’s own portfolio of 4 million square feet is currently more than 95 percent occupied, and quality medical office space remains in high demand. There are, however, some noteworthy developments taking place both inside and outside the healthcare industry that are shaping its future. Medical office real estate trends locally and regionally are beginning to reflect those changes.

Consolidation Wave

Perhaps the healthcare trend with the most significant potential to alter the medical office and medical real estate marketplace in Southeast Michigan is that of consolidation — healthcare systems coming together via mergers, acquisitions and strategic partnerships.

This trend is, in some respects, similar to what has occurred in the banking industry during the last decade. We are likely to see the same kind of phenomenon continue to pick up momentum in healthcare during the next five years or so.

There are three primary forces driving this trend. The first is the increasingly high bar necessary for access to capital, with credit tougher to come by and Wall Street favoring larger borrowers. The second force is simply the need for more market share. The third is the move to electronic medical records (EMR) — specifically the high upfront costs of getting a new EMR system up and running.

The EMR mandate’s inclusion in the recent healthcare reform legislation begins as a carrot and moves quickly to a stick, with a 2014 deadline for providers to move to EMR or face a discount on their Medicare reimbursements. Considering the fact that it can easily cost tens of millions of dollars to convert to a full electronic records system — with a significant portion of that cost passed on to the physicians — there is a strong motivation for physicians to align themselves with larger hospital systems that can pay for and manage the transition to EMR.

During the last few years, that consolidation trend has been clearly evident in Southeast Michigan. Vanguard Health acquired Detroit Medical Center and its eight regional locations in 2011. The region continued to see more big moves during 2012 with the merger of two of Michigan’s larger hospital groups, Henry Ford Health System and Beaumont Health System.

Additionally, the University of Michigan Health System acquired a minority stake of MidMichigan Health in 2012. Other national systems, such as Trinity Health and Ascension, are continuing to look to acquire other systems, not only in Southeast Michigan, but also across the country.

‘Multi-specialty’ is the Buzz

So, the big question is what does this trend mean for medical real estate in the region? The biggest impact that we are seeing is a move toward larger, multi-specialty centers rather than the more traditional stand-alone physician buildings. These are full-service multi-specialty buildings, with large imaging centers, labs, diagnostic centers and family practice facilities all in one location.

Together, with this move toward a different type of real estate, we are seeing a shift to facilitate a more efficient and comprehensive model of care and service. These centers are, and will be, operated so that they are available during what are traditionally considered to be retail hours instead of the standard medical office hours of 9 to 5.

These facilities, such as the 100,000-square-foot building that the University of Michigan is building in Livonia, Mich., will generally range from 50,000 to 150,000 square feet, and will look somewhat different than the facilities of the past. In general, moving away from the standard medical office toward a specialty model will require facilities that are not only larger, but also more efficient.

Many newer facilities are embracing new layouts and design concepts such as shared waiting areas that can realize space savings of 20 to 30 percent. Consolidating facilities into larger, community specialty centers is also likely to be a good fit with what is almost certain to be an increased demand for medical services in the wake of the landmark 2012 Affordable Care Act.

Ironically, Southeast Michigan is also experiencing strong growth at the opposite end of the medical office scale: the small 4,000- to 5,000-square-foot locations in strip malls and similar locations.

While the rapid growth in outpatient surgical centers that the region experienced five years ago has moderated, there is a renewed push for urgent care and after-hour clinics, as well as dialysis centers and physical therapy and pain management clinics.

Not only do these locations provide ease of access and convenience for patients, but they also function increasingly as feeder centers for emergency departments and the new breed of larger consolidated centers. After-hours and urgent care facilities are an ideal way to strengthen a hospital’s brand and extend its presence.

Currently, hospital organizations are engaging in aggressive site searches for multi-specialty centers throughout Southeast Michigan. In a region where overall population growth has been fairly stagnant, hospitals understand that these facilities are an important tool to capture and grow market share.

McLaren Health is an example of a regional brand that has been pursuing an aggressive expansion plan, both in Southeast Michigan and across other areas of the state. McLaren is establishing itself as a super-regional hospital organization, and is currently petitioning the state to build a significant health park in Clarkston.

Real estate professionals who want to service this expanding sector in the years ahead must understand the needs of a healthcare organization, but they will also need a firm grasp of the nuances of the Stark Law with respect to setting up leases within these new consolidated centers. They also need to appreciate the relationships between the different departments present in a profitable multi-specialty facility.

Here in Southeast Michigan, the current trends make it abundantly clear that specialized insight will become an increasingly important piece of the medical office puzzle in the years ahead.

— Andrew Farbman, CEO, Farbman Group