Three Ways Medical Real Estate is Different From the Rest

Diagnosing the differences of a dynamic medical commercial real estate market

It’s not exactly breaking news to point out that the healthcare industry is booming. Driven by large demographic shifts (more than a third of all Americans are now over the age of 50, and the number of people over the age of 65 is expected to virtually double over the next 30 years) the need for quality healthcare service is not just growing, but is expected to continue to do so for the foreseeable future.

Because demographics drive dollars, the economic impact of these generational trends is dramatic. The healthcare industry is now the nation’s single largest employer, and healthcare spending is the fastest-growing segment of the economy—projected to spike nearly $2 trillion over the next ten years.

With growing demand and an industry undergoing rapid growth, it was inevitable that healthcare providers would need to seek out new real estate opportunities. In that context, the explosive growth of medical commercial real estate seems like a foregone conclusion.

Hospitals and healthcare organizations have broadened their horizons and recognized the need to go beyond traditional downtown medical/hospital campuses.

From doctor and dentist offices to labs, clinics, and other outpatient service facilities, U.S. healthcare real estate is evolving and appearing in new spaces, places, and formats.

Medical commercial real estate is a particularly active segment, with medical office buildings (MOBs) now representing nearly 40% of the value of all healthcare real estate assets nationally. JLL’s 2019 Healthcare Real Estate Outlook reports that rents for MOBs reached new highs in the first part of 2019.

Understanding the increasingly lucrative and influential medical commercial real estate marketplace should be a priority for owners, investors, and healthcare decision-makers alike.

From tenant characteristics to co-tenancy considerations, to the nature of the facilities themselves, there are key differences between medical commercial real estate and traditional commercial real estate tenants.

Co-tenancy in the Healthcare Industry

Co-tenancy considerations are part of the calculus in virtually all commercial real estate settings. But while some medical commercial real estate tenants can thrive as stand-alone healthcare tenants among more traditional commercial real estate concepts, others tend to benefit when positioned as part of a larger constellation of service retail options or, ideally, complementary medical/healthcare uses.

Landlords who secure a primary care tenant may elect to subsequently target specialists or other related medical service providers. With a critical mass of healthcare real estate square footage in place, signing a larger medical anchor such as a lab or pharmacy gets that much easier.

Coordinating these co-tenancy relationships at scale may require more formal partnerships between larger regional and national healthcare networks and commercial real estate owners and investors.

Stability in Healthcare Real Estate

Because medical commercial real estate leaseholders are comparatively stable compared to a traditional commercial real estate tenants, they have rapidly emerged as valued and valuable members of commercial developments in markets across the country.

Medical commercial real estate occupants are relatively recession-proof—or at least recession-resistant—and are therefore generally more amenable to signing longer-term leases with favorable yields.

Structural changes within the healthcare industry have contributed to that stability, with the decrease of independent and private practices and the ongoing trend of acquisition and consolidation into larger hospitals and healthcare networks. The institutional and economic stability that this consolidation provides makes medical commercial real estate tenants increasingly attractive to owners and investors.

Amenities and Priorities of Medical Office Buildings

What healthcare real estate tenants are looking for in a building can vary considerably depending on the nature of the service they provide. Many of the basics are familiar to any retail real estate professional, including:

• Demographics
• Accessibility
• Visibility/signage
• Maintenance considerations
• and more!

But a large medical office facility with several practices is going to be looking for different things than a smaller independent provider in a neighborhood center.

Healthcare real estate tenants in a retail setting generally require less parking and have less foot traffic than traditional retail tenants.

Consumer-facing providers like doctors, dentists, and the rapidly expanding population of convenient care providers (which encompasses both clinical providers and urgent care facilities) are typically interested in maximizing visibility.

Healthcare real estate tenants ultimately need to weigh the pros and cons of more costly retail spaces, which typically come with greater access and visibility.

More traditional office facilities often have a lower price tag, superior lighting, and more favorable maintenance support.

Medical office buildings are specifically designed and built for healthcare providers and consequently are equipped to deliver the services and amenities that healthcare users sometimes rely on.

In the diverse, dynamic and rapidly expanding healthcare real estate marketplace, understanding the array of commercial real estate opportunities and tenant- and site-specific considerations will continue to be a key priority going forward.

Learn more about Farbman Group’s Medical Real Estate Solutions