Medical office real estate has emerged as a significant and robust subclass of office real estate. (The category can be very broad and include everything from a hospital facility to a chiropractic office.) There’s been exponential growth in this market segment in recent years, and current demographic trends indicate that the growth trend will continue for decades to come. An aging population, coupled with the mass retirement of the baby boomers, will presumably spur demand for medical services required by that
population. Simply put: demand for those services creates demand for the real estate that houses them. Hence the rise of medical office space. This apparent demand has also made medical office space a preferred product type for investment buyers who anticipate consistent and certain income in the foreseeable future.

However, within this generally positive outlook for medical office space, there are some tones of unpredictability.

First, there’s the ongoing possibility that the Affordable Care Act may be altered, or completely overhauled, or completely scrapped, which would cause some unpredictability in certain medical practices’ revenue model.

Additionally, we have been in, and likely will continue to be in, a massive shift toward consolidation of larger medical practices and organizations, along with their corresponding facilities. The small one- and two-physician practices that existed for many years are being displaced by large practices with multiple physicians. As a result, medical space that is geared towards smaller practices may see greatly diminished demand if it can’t adapt to facilities able to accommodate large occupants.

Another factor impacting medical space and its location is the patient’s preferences as to where they obtain their services. Generally, medical space is located in two geographic distinctions:

  1. On-campus space — meaning on a hospital campus, where a patient may be traveling some distance from their home or workplace but is visiting their provider on a campus with other specialties and ancillary services present, both inpatient and outpatient.
  2. Community setting — meaning a clinic or outpatient facility that’s located in a community-based setting, amongst rooftops, and geared to be convenient for the patient. Usually, these are a short distance from a patient’s home or workplace.

The consumer trends in recent years have demanded convenience, sometimes in the form of “convenient care” clinics located in the community retail setting. The future may require services to become even more convenient to the consumer. There’s some chatter in the industry of clinicians practicing inside of grocery stores and pharmacies such as Walgreens and CVS. Should the industry respond and accommodate that consumer preference, it could redirect demand from on-campus space and other large clinical facilities into community-based medicine that blurs the line between clinical and retail space.

On a local level, the medical industry, and the corresponding real estate that serves it, has thrived. Columbia now has several hospital campuses and significant specialty facilities that have made our community a regional draw for health care services. This is among the reasons that the recession didn’t hit Columbia with the same ferocity it hit other communities, and we recognize that to the point that “medical tourism” is now being focused on as an asset that we’ll attempt to nurture in the future. If we’re successful, our community will see robust economic growth as a result. And I believe that will translate to high occupancy rates at both on-campus and community-based clinics.

 

Mike Grellner is the vice president of Plaza Commercial Realty.

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