Healthcare: Medical real estate moving at healthy clip
Brokers, contractors and landlords are hot on the trail of one of the few bright spots in a languishing commercial real estate market – medical tenants.
Not only are doctors and dentists doing deals, but they appear to be somewhat untouched by the flight to frugality seen in other sectors of the office market.
“For the time being it appears to be a more recession-proof industry than others in the valley,” said Gregory M. Davies, a broker with Santa Clara’s CPS Corfac International.
Plus, medical business tends to be lucrative because rents can be as much as 50 percent higher, and the construction work required to outfit an office to receive patients is more costly – in the range of $100 a square foot up to $300.
None of this escapes Matthew Oliver, who with his partner Michael Peiser of Oliver & Associates bought a run-down, three-story structure at 100 N. Winchester Blvd. in Santa Clara in late 2007 with a sharp eye to its location. The structure, built by the DiNapoli-owned D&D Ranch in 1968, is just a stone’s throw from Santana Row and Valley Fair. More important, it’s just half a mile from O’Connor Hospital.
“We looked at this as a clear opportunity for pursuing and supporting the medical office community because it’s so close to O’Connor Hospital,” said Oliver, whose office is in San Mateo. “O’Connor is a private hospital, and it needs a lot of private support.”
That’s another reason Oliver hopes his building strikes a chord among medical professionals: the limited amount of office space now available around the hospital.
Mindful of the amount paid for the structure – which he would not disclose – Oliver said he was careful about how much to spend sprucing it up. About $1 million went into taking off a derelict carport, adding a storefront entry with a lobby and installing controlled access gates to the parking lot. The crowning touch may be the atrium through the front doors that gives the project its name, Santana Atrium Professional Center.
“We definitely have some activity,” Oliver said. “We should have a couple of deals to announce in the next couple of weeks.”
Brokers are busy
Colliers International broker Alice Teng, who has built her three-year business on finding space for doctors and dentists, is marketing the building once known as the Winchester Mall, along with her Colliers colleague Steve Hunt.
Teng said space needs for medical tenants can be smaller, but the space is more expensive – $3 to $4 a square foot compared with $2 or less for general offices – and these tenants sign longer-term leases. For Teng, who left a career selling pharmaceutical products, supplying space for medical tenants proved an excellent fit.
“There is a demand,” she said. “I have 24 listings for medical buildings. Yesterday, I did two tours, one for 4,000 square feet and a second one looking for 5,000 to 10,000 square feet.”
Deals – especially in this market – are far from easy. A typical timeline is six months, she said.
But at least there’s activity. Hunt, a veteran broker who has focused on the office leasing sector, said the bulk of the real estate deals since the downturn began has been among medical tenants.
“We’re seeing doctors coming from downtown San Jose who were located near San Jose Hospital, which is no longer a hospital,” Hunt said. Their leases are rolling, he said, and the doctors want to be near O’Connor Hospital or Santa Clara Valley Medical Center.
Other South Bay cities are seeing a similar trend. Davies said the Palo Alto Medical Foundation is pursuing several projects on Old San Francisco Road in Sunnyvale. Plus, the new El Camino Hospital in Mountain View has created demand from the medical community by doctors who, again, want to be near a hospital.
Finally, Davies said, Stanford University’s decision not to renew medical leases on its buildings on Welsh Road because the property will become part of their redevelopment of its hospital has created more demand in the already strong Palo Alto market.
“With an aging population there’s not going to be a shortage of demand and business for docs,” Davies said.
Another aspect driving the trend is that doctors realize patients have a choice among medical caregivers and want to offer patients as pleasant an experience as possible.
“Think about your general practitioner’s office. There’s probably old magazines, uncomfortable furniture and it desperately needs to be painted,” said Brett McLarney, vice president of McLarney Construction Inc. “What we’re seeing is, as the doctor or the practice moves, they’re striving to improve the feel of their offices. They want to update and upgrade the reception lounge area and even the patient rooms to make it more inviting because there’s competition.”
So McLarney said his 23-year-old San Jose company is going after the business. Currently, 90 percent of the company’s business is tenant improvements, or building out interior space to meet a company’s needs, and just 5 percent involves medical offices.
“We’re looking to expand in that segment because it’s consistently strong,” he said.
Silicon Valley / San Jose Business Journal – by Katherine Conrad
Katherine Conrad can be reached at 408.299.1820 or kconrad@bizjournals.com.
