Healthcare V Michigan

A new prescription: A look at the changing world of healthcare real estate

Andrew Farbman

The world of healthcare real estate keeps changing. Guest author Andrew Farbman, from the Farbman Group, highlights how these changes will impact commercial real estate professionals.

Guest post by Andrew Farbman CEO, Farbman Group

Already one of the fastest growing real estate sectors, medical office space seems poised for continued growth in the wake of the 2012 passage of the Affordable Care Act. Analysts and industry observers anticipate significant growth in patient volumes and a corresponding need for new and expanded health care facilities. No less an authority than the Urban Land Institute projects that the demand for medical office buildings will increase 19 percent during the next 5 years.

State and regional trends across the Midwest mirror those national projections. Fueled by an aging population and a strong system of public, private and university hospitals, healthcare expansion continues to be an economic heavyweight, and regional demand for quality space remains high; Farbman Group’s own portfolio of greater than 4 million square feet of medical space is currently more than 95 percent occupied.

But growth and increased demand does not tell the whole story. As the healthcare industry changes in response to economic, healthcare, legislative and societal pressures, the medical office real estate market across the Midwest is starting to reflect those changes in ways that are both predictable and surprising.

Coming together

One of the most noteworthy medical real estate trends is consolidation. Whether through mergers, acquisitions or strategic alliances, hospital systems and healthcare networks across the Midwest and the nation are coming together to form larger entities at a rate never before seen in the industry. This trend is motivated partly by the need for increased capital and financial leverage, partly by the desire to capture more market share, and partly by the need to accommodate new financial and technical realities in healthcare—most notably the mandated move to electronic medical records.

The 2014 deadline looms large for many healthcare providers, who are faced with the choice of fronting the high initial costs of moving to a new electronic medical records system or confronting a damaging discount on their Medicare reimbursements. Larger networks and established systems that can more easily handle the multi-million-dollar price tag and logistical complexities of electronic medical records conversion are an appealing destination for physicians and smaller entities looking for a solution.

In Michigan, some high-profile consolidations have made headlines in recent years. In 2011, Vanguard acquired Detroit Medical Center and its eight regional locations, and in 2012 the University of Michigan Health System acquired part of MidMichigan. Even Henry Ford Health System and Beaumont Health System discussed a merger (but did not execute one).

Consolidation implications

For real estate professionals, the consolidation trend means a greater need for large specialty centers in lieu of the traditional stand-alone medical office. Because these are far more likely to be full-service medical facilities—complete with the sophisticated imaging infrastructure, laboratory capabilities, and diagnostic and traditional family practice offices all in one space—real estate professionals will need to have a deep understanding of the technical, logistical and structural demands that are unique to those buildings. From leases to layouts, and from structural specifications to specialized service spaces, these new specialty centers require category-specific experience and expertise to execute successfully.

High efficiency

The need for larger, newer and more efficient multi-purpose facilities is being driven by more than just consolidation: the healthcare industry is evolving towards a new service model that is more flexible and accommodating, with longer hours and a more comprehensive range of on-site care options.

The 100,000-square-foot center that the University of Michigan is currently building in Northville, Mich., will include both primary and specialty care offering services including radiology, ultrasounds and MRIs. The facility will even have a gym for physical therapy patients. The size of the facility, and the scope of services it offers, is typical of this new category of medical facility, which generally ranges anywhere from 50,000 to 150,000 square feet. These new specialty centers are not just bigger and more comprehensive, they are also more efficient. Innovative new design concepts can realize efficiencies that save patients time and medical tenants space (not to mention dollars).

Getting bigger—and smaller

Medical office space is not just getting bigger—it is also getting smaller. At the same time that large new specialty centers are on the rise, we are seeing a corresponding increase in much smaller spaces focusing on convenience and access. These locations—which are typically in the 4,000- to 5,000-square-foot range—are frequently located in strip malls and existing retail centers and focus on providing a specific medical service such as dialysis, physical therapy or pain management. Urgent care centers and after-hours clinics are another fast-growing category of small-scale medical office space. There is a synergy here between these small sites and the new super-sized medical facilities: smaller offices that are affiliated with larger networks can funnel patients to the larger centers and also serve as a kind of brand ambassador—expanding and extending a hospital’s visibility within the community.

A new prescription

With these trends in full swing, national and regional healthcare organizations are moving quickly to identify promising sites across the Midwest for this new generation of large multi-specialty centers. Real estate professionals who want to capitalize on this trend and service this rapidly expanding sector cannot just sit on their hands and hope for the best. They will need to ensure that they understand the needs of hospitals and healthcare organizations, as well as the legislative and regulatory issues that apply to medical real estate.

This includes issues ranging from the implications of Stark Law on structuring leases within these new consolidated centers, to the synergies and strife that can exist between not only different practitioners within a marketplace but different departments within a single facility. That is the kind of specialized insight and understanding will likely be a prerequisite for sustained success in the medical office sector in the years ahead.

Andrew Farbman is chief executive officer of the Farbman Group, a full-service real estate firm in Southfield, Mich. The firm manages more than 25 million square feet of office, retail, multi-family and industrial space throughout the Midwest.