Two words — potential and unknown — can be used to sum up the current state of the medical office real estate market. Officials in the real estate and healthcare industries are anxiously waiting for the federal government to decide on a given path for healthcare reform and are hesitant to pursue new deals.
At the InterFace Medical Office conference October 21 at the InterContinental Buckhead in Atlanta, real estate brokers and developers joined with healthcare providers and hospital representatives to talk about the healthcare industry. In six panels and a roundtable session, attendees discussed the current lending climate, the state of the market and the future of healthcare real estate. The underlying theme of the day-long conference? Confidence is needed for investors to re-enter the market and for tenants to stop fretting about the future.
“Until we get some clarity on healthcare reform and until we get some improvement in the capital markets, I don’t think we’re going to see a ramp-up of transaction volume,” said Scott Evans, managing director of Cain Brothers & Co.
On the leasing side, tenants don’t want to make a move until they know how the office market will play out in the immediate future. In an effort to execute leases even in the current atmosphere, free rent and other concessions are being offered in conjunction with shorter lease terms. Tenants also are paying more attention to the landlord’s track record because choosing a strong landlord without financial trouble is key in today’s market.
“Healthcare reform and the economy are certainly slowing things down even further,” said Chad Pinnell of Skilken-Pinnell Healthcare during one of the three afternoon sessions. “The physicians are delaying decisions, so the leasing folks have to be more creative.”
Capital in the commercial real estate world is still hard to come by, and financing a new medical office building is as difficult as finding money for a new retail project. According to Eric Fisher of Trammell Crow Co., partnerships between developers and healthcare systems are the best way to get a project off the ground. “Within the development world, capital remains constrained. The capital that’s available is much more onerous related to recourse and certain other aspects,” he said. “The systems that we’re working with, there’s a recognition that they will be capital-strained for the next decade-plus.”
Most attendees at the conference see the market not leveling out for the next year or two until lenders once again start lending and buyers decide to start buying. “In the very near term, 2-3 years, you’re going to see stagnation. You’re going to see a lot of deals pondered but not completed,” said Michael Young of Grady Health System. “Longer-term is very favorable.”
Development isn’t the only issue that needs to be evaluated; hospital officials also need to think about how to position themselves regardless of governmental reform. Hospital owners can start thinking about equipment buying strategies as well as how to move into new property types to better treat patients. Regulation, at its purest form, is good for the medical office community because it will help officials branch out into retail centers and other spaces not previously utilized. The next trend in healthcare real estate will be a move away from hospital campuses to smaller, more specialized venues, said David Park of Novant Health. This might mean small clinics will take up residence in retail centers or that services typically housed in hospitals will be moved to medical office buildings across town.
As Park succinctly put it during one session, “Ambulatory is the wave of the future.”