Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.
Issue link: https://westernrealestatebusiness.epubxp.com/i/595440
30 • November 2015 • Western Real Estate Business www.REBusinessOnline.com TOP 5 TRENDS DRIVING HEALTHCARE REAL ESTATE DEVELOPMENT 2. Bigger is better. Between 2009 (when the ACA was signed) and 2012, the annual number of hospital merg- ers and acquisitions (M&A;) more than doubled. One major consequence of these M&A; transactions and system afliations is the creation of domi- nant medical systems that have a ma- jor infuence in the markets that they serve as they focus on acquiring top tier physicians and practices. A recent survey found that 20 percent of pri- mary care physicians were employed by hospital systems in 2014, which is double the number of primary care physicians from 2012. (Since direct employment is not allowed in Califor- nia, employment is achieved through the use of the foundation business model.) Critical to attracting physi- cians and increasing market share is the ability to provide high quality fa- cilities that are also visible and acces- sible to patients. We expect the trend of M&As; to continue, further giving infuence to the increasingly powerful regional hospitals and health systems. The downside to these M&A; trans- actions is that the weaker, non-proft hospitals will simply not be able to compete with these large, extremely fnancially-sound systems. 3. Convenience is key. The demand for convenient and fexible healthcare services, often referred to as the "re- tailization" of healthcare, is forcing health systems to locate real estate be- yond the traditional hospital campus and medical ofce building complex. Many health systems are now posi- tioning primary care and specialties such as dialysis clinics in standalone buildings or retail centers that are con- venient to both patients and physi- cians. Kaiser Permanente, California's largest HMO, recently announced a partnership with Target to open clin- ics in several of its Southern California stores. We expect this trend to contin- ue in the coming years giving the cost advantage of providing basic services in retail settings as opposed to higher acuity hospitals. 4. Flexibility is crucial. Healthcare space itself is changing, mirroring what is happening in commercial real estate in general. Doctors and staf are now requiring more open and fexible layouts, enabling them to move freely throughout the space and utilize mul- tiple work stations rather than being anchored to a single location or of- fce. The change from solo and small group physician practices to multi- physician, multi-specialty practices is also afecting the size of medical space needed. While the transition to larger, more efcient networks would seem to imply a reduction in square footage per physician is needed, in fact the opposite is being observed for many reasons. One reason is the increased use of nurses and physician assistants, which increases efciency and enables practices to serve more patients in less time. Also, some procedures such as imaging and minor surgeries, which in the past were typically done in a hospital, now are occurring in an outpatient environment. The result of being able to see more patients per day and perform more procedures without needing a hospital is in fact increasing the square footage require- ments per physician. 5. Investor demand is strong. Medi- cal ofce properties remain highly sought after by commercial real estate investors. Medical ofce sales volume totaled $3.3 billion in Q4 2014, the high- est quarterly total since Q4 2006. RE- ITs in particular are paying extremely aggressive prices for top tier assets. High quality institutional grade assets are the most heavily pursued by investors, trading at cap rates at or in many cases below record low levels. In 2014, cap rates in the West Region trailed only the North East Region. REITs still dominate the healthcare acquisi- tion market, accounting for 46 per- cent of buyer volume in 2014, which was up from just 16 percent in 2013. Further refecting this incredible de- mand, we are now seeing some proj- ects acquired and closing before they are even completed. With the strong historical stability of the MOB prop- erty type and favorable demographic trends, Meridian expects sales activity to remain strong throughout the up- coming years. Based on the recent data, demo- graphic trends and the lack of devel- opment opportunities, we expect the healthcare real estate sector to remain strong for the foreseeable future. John Pollock, COO, Meridian, a full-service real estate developer and owner of medical real estate based in San Ramon, Calif. HEALTHCARE from page 1 Meridian is also developing medical offce space in Palmdale, Calif. This one is occupied by DaVita, which provides a complete range of dialysis treatments and support services for patients living with chronic kidney failure. The company develops space up and down California. This medical offce building is located in Berkeley, Calif. Meridian acquired an 8,171-square-foot former post offce building for $2.1 million in Walnut Creek, Calif., and invested $2.3 million to convert its use to medical for a dialysis clinic. Meridian built this freestanding single-tenant building for DaVita on an outparcel in front of Home Depot in Pomona, Calif. The addition of medical services into this struggling center helped to increase traffc and breathe life into an otherwise dying center. Petaluma Health Center occupies the medical offce building in Rohnert Park, Calif., located at 5900 State Farm Drive. Pollock