Medical Space Leads Office Market Recovery


Enn Luthringer, News-Press

       In most office markets and particularly Southwest Florida, the medical office sector is somewhat “sheltered” from major changes in economic cycles due to the necessity of its service. Nonetheless, the medical office market saw its share of changes during this time, and these changes have impacted the dynamic and make-up of today’s medical office demand.

     The Shifting Landscape

       Despite the ability to weather the downturn better than its “traditional office market” counterparts, medical office users, like many users, found themselves with a real need to “right size” their space and improve efficiency. Coupled with the impending impact of Health Care Reform, medical practices struggled to streamline processes, services, enhance efficiency and handle a significant increase in patients.

       While “right sizing” for some practices meant learning to function with a smaller space footprint due to cutting operational costs, for others, the space footprint remained the same, yet the use of the space was materially altered. Improved productivity translated into the need to free up valuable space for additional patient rooms and core income-generating services. Strategies to accomplish this goal included shifting specialty services off-site or eliminating some services all together. Administrative services, in-house billing, and other services were repositioned to off sites areas where operational costs were considerably lower.

       The residual effect “right sizing” is two-fold:

  1. Better utilization and optimization of existing facilities

  2. A potentially underserved specialty medical market—ripe for new players as the economy regained strength

Medical Office “Out in Front”

A survey of all newly constructed office buildings in Southwest Florida from the noted “bottom” of the recession (2010), revealed a trend which certainly seems to support the importance of the medical office sector in the overall office market growth and recovery.

According to our source, 28 non-governmental office assets under 100,000 square feet in size were constructed in the period between 2010 and 2014. Of those 28 buildings, 20 (71%) are medical-designated facilities.  In terms of size, these 20 medical assets total approximately 240,000 square feet—an overwhelming majority (18 of the 20 projects, and 233,116 of the 240,000 sqft) were built to suit projects for medical users. The build to suit option allows both smaller scale and larger sized medical practices to customize their facilities for efficiency and future expansion.

Speculative construction in the medical office market has not been prevalent and will likely not see a near-term increase due to the higher cost of medial build out compared to that of traditional office. Further, some view speculative medical build out as risky due to the uncertain nature of the future of the health care industry.

Reason Behind the Rise and Strategy of Location

The limited supply of functional existing spaces means medical buyers have fewer choices. Any decent existing inventory will see premium pricing yet, assets with features insufficient to accommodate the reality of a changing medical industry (including antiquated parking ratios) will continue to struggle to appeal to today’s medical users.

As a result, more users will consider build to suits—particularly those in strategic locations near hospital expansions which has already seen a considerable uptick. In fact, 7 of the 18 newly-constructed build to suit projects in the aforementioned market survey can be categorized as “shadow locations” to Gulf Coast Medical Center—which just underwent a $29.5 million expansion. This expansion adds the region’s only Level III Neonatal Intensive Care Unit, the area’s first Pediatric Intensive Care Unit, and a new Adult Intensive Care Unit to its existing operations.

       In addition to locations near existing hospitals, other medical trends are expected to continue to gain traction including:

  1. MedTail: Medical users strategically emerging in full force in retail centers to capitalize on the traffic draw. The recent shift of specialty services away from core primary physician offices makes retail spaces even more feasible options for health care providers.

  2. Med-Centric Development: The strategy of campus-styled complementary medical services clustered in one location for ease of use for clients, and traffic enhanced traffic generation.

Trends to Watch

Further streamlining of core practicing and improvements in medical technology also play an intregral role in the shifting landscape of medical space.

  • Advances in minimally-invasive techniques significantly increased the number of procedures patients could receive as an outpatient in off-campus facilities—acting as a springboard for increased levels of specialty build to suit buildings.

  • Continued escalation of land prices for parcels that “shadow” hospitals

  • Increased demand for flex space and office space with lower operational costs resulting from the strategic re-balancing of administrative space allocation vs. patient room allocation. This trend is also supported by increased occurrences of off-site storage with lower overall cost.

  • Local single-user build to suits will continue to be major players, yet, larger, well capitalized developers will emerge in prime locations in a quasi-build to suit / speculative blend of space.

As Baby Boomers grow older, positioning medical facilities for ease of use and convenience will continue to be an important factor. New technologies and processes are being developed making older medical spaces obsolete, and will continue to drive new growth in newer spaces and locations to service an ever increasing population base.

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