Darren Lizzack, MSRE Associate VP NAI James E. Hanson 201 488 5800 x104 dlizzack@naihanson.com More Info

Healthcare Bill Passes, What Now for Medical Office Buildings (MOB) and Professionals?

I had the privilege of attending and speaking at the Green Pearl Events Medical Office Real Estate Symposium on Tuesday, March 30^th 2010 at the McGraw Hill Conference Center in Manhattan. There were over 230 people from 171 firms who attended this well timed event shortly after the new health care reform bill had passed. While I do not want to focus on what happened at the event, I would like to share some of my thoughts after attending this great event. (Click here to view my panel discussion).

Demand for Medical Office Buildings

Everyone knows that commercial real estate is experiencing the aftermath of what has been the fallout of the longest up-swing the real estate arena market has faced in history which means the cycle must begin all over again and typically this occurs at the bottom. It took approximately 15 years to reach the height of the market which occurred back in 2007 and has been spiraling downward the past couple years. Medical and healthcare real estate professional has found themselves included in this mix, and the market has been in a state of paralysis with the other sectors. There are some major differences that one should recognize given the demographics that are analyzed to study this sector. The new healthcare bill is going to eventually call for insuring millions (approx. 30 million) of people that as of today, do not have any insurance. The number of doctors graduating from school today (approx. 25,000 annually) is substantially less than the staggering number of baby boomer doctors that are expected to retire each year (approx. 30,000) annually over the next 10 to 13 years. Therefore, I am predicting that demand for MOB for the foreseeable future will continue to rise.

What Does This Mean for Doctors?

I turn to basic economics to help me answer this question. While I cannot speak to the entire country given I spend most of my time working in Northern New Jersey, my take on this topic may be slightly skewed, but the overall concepts remain the same. Let’s first touch base on what this means for doctors because during my travels over the past year, they have been quite nervous to find out how the new health bill is going to affect them. Most doctors rely on reimbursement from insurance companies from billing them for services rendered. When doctors learn that Medicare is going to drop reimbursements by 21.2%, they certainly have reason to cry the blues given they have to see that many more patients to make the same amount of money as before. This was the biggest reason doctors were in a state of paralysis over the past year and were afraid to make any long-term decisions because of this large unknown.

Now that the bill has been passed, everyone can get past the shock and simply figure out how to work around this new system. Some doctors are going to get away from traditional practices and look for specialties that may help improve their bottom line. Some older doctors may decide to retire early, and some people that were thinking of becoming doctors may simply look into other fields of business and pass up the opportunity to introduce themselves into the medical field. We live in a capitalistic society where only the strong survive and believe in me, this will continue to hold true. I believe that where there is a will, there is a way and the smart folks out there will figure ways to work with this system or work around it. In my opinion, though, the ones that stick it out will do just fine in the long-run. No doctor is going to starve and given the staggering new population that is about to enter this arena of needing medical attention in some capacity, whether it be from the new healthcare bill or simply due to the aging population, medical care is going to continue to be in demand.

What Does This Mean for Real Estate Professionals?

There is a large misconception that many healthcare professionals continue to have when it comes to medical office space. They see and hear things that are going on all around them and they feel this may hold true for them as well. I cannot tell you how many doctors have come to me thinking they have so many choices when it comes to identifying and securing a new location to operate their business. While I would agree with them that there is a tremendous amount of vacancy in the marketplace today, more than there has been in the past 15 to 20 years, I cannot tell them there is an infinite supply of medical office space that will be conducive to running their business operations.

The biggest challenges doctors face today when it comes to real estate are parking, parking, and location. And I wrote parking twice on purpose because most medical practitioners do not understand that not only are owners against bringing medical groups into their buildings (oftentimes due to the heavy traffic and extended wear and tear these business have on buildings), but also the fact that you cannot simply take any office building and convert it to medical office space due to zoning restrictions. Municipalities have much more stringent parking requirements for medical office businesses and this oftentimes prevents doctors from pursuing those opportunities. And sometimes, they proceed forward thinking they are going to go through the process of spending money hiring professionals to help them only to find out they should have simply taken the money and flushed it down the toilet.

Now that we eliminated some common misconceptions, we are left with current inventory for MOB which, in NJ, is approx.438,000 sq. ft. of vacant medical office space (out of 2,351,958 sq. ft. in total medical office space) or 18.6% vacancy rate for Medical Office Space in Bergen County. This number can also be skewed by large projects which can accommodate medical office tenants so the number of locations can be considered somewhat scarce. And think about the average medical office requirement equating to approx. 2,000 sq. ft. And each doctor who goes into the market looking for space to run their business can never be too careful when deciding where to locate because the costs to open up the practice is not like your average office build-out either so they often remain in the same place for much longer periods of time in comparison to general office users. Therefore, the average medical practitioner takes much longer to make the final decision as to which location they wish to pursue. In other words, doctors take a long time to make their final decisions, but once they make their decision, they stick with for the long-haul!

Summary

To summarize, I strongly believe in the MOB sector and because of this, I decided a couple years ago to focus my concentration on this unique sector. If you own a building with medical occupants or you are a medical practitioner, I am hopeful you have a professional on your side with your best interest in mind, and if not, I recommend reaching out to me for a conversation in this regard so that I may help guide you through these difficult, challenging yet exciting times. Things will get better and I predict they will improve faster in this sector versus other commercial real estate sectors such as retail or general office space. I have seen improvements already since the beginning of this year and I expect it will be continue for years to come although this year will be the slowest while the sector builds momentum. In consideration for your time and mine, I have only touched the surface of many issues that come into play for healthcare professionals as well as real estate professionals servicing the healthcare industry. I welcome you to post comments and provide me with feedback. This article will be posted as a blog entry at www.njcrea.com or you can simply click here to link you to my blog page where you will find all my blog entries that I have written over the past 2+ years.

I hope you enjoyed this month’s issue and you found some/all of the information interesting and/or useful. If you need additional information on these terms or the ones I have left out, feel free to contact me directly at your convenience at dlizzack@naihanson.com. And if I am not the one to best answer your specific commercial real estate related question(s), feel free to contact any of my peers that are associated with New Jersey Commercial Real Estate Alliance (www.njcrea.com); I am confident that one of us can help you.