Healthcare: Stability of medical real estate attractive to developers
Anthony Burks, president of Vendigm Co., typically focuses his development skills toward public infrastructure construction work. But like many in real estate these days, Burks has caught a case of medical real estate fever.
“I am trying to hit the medical renovations and construction work area a little bit more,” said Burks, a Fort Worth native. “From what I’m noticing and seeing with places like JPS and Harris Methodist and all the servicers, when you look at what’s going on in other markets, health care is where a lot of the work is at right now. There’s a little more opportunity there and it seems like they’re the only ones that have a little money right now.”
In fact, according Marcus & Millichap Real Estate Service’s Medical Office Research Report, which covers the first half of 2009, medical office properties continue to garner investor demand as the sector has remained somewhat insolated from the recession that has ravaged other property types. In the Dallas-Fort Worth area, medical office vacancy rates were up a tick to 14.7 percent in the first quarter of 2009 compared to 14.6 percent for the same quarter a year ago, according to Marcus & Millichap. The slight rise has resulted in a 3 cent decline in the sector’s rental rates, sliding to $22.35 for the first quarter of 2009 compared to asking rents of $22.38. This small change tells the whole story, said Drew Kile, regional manager of the Fort Worth office of Marcus & Millichap.
“Medical office space has certainly been one of the more stable sectors and will likely continue to be more stable than other areas,” Kile said.
According to the research report, the nation spends more than $2 trillion on health care annually, more than double the U.S. expenditures on food, and health care spending is projected to exceed $3 trillion by 2013. Much of the growth in the industry is due in part to the baby boomers, or those Americans 55 years of age or older. In a separate report, addressing pending federal health care reform, Marcus & Millichap studies showed national per person office visits for 45- to 46-year-olds have expanded by 7 percent annually. If the proposed national health care reform insured 95 percent of this cohort, physician office visits could increase by 12 percent, or 34 million visits, driving the need for about 5,400 new physicians and nearly 10 million square feet of new medical office space nationwide.
Kile said his organization released the health care reform packet to take a look at what the future could hold for medical office space.
“We wanted to put pen to paper in terms of in the event they do get some sort of health care reform, and take a look at what it would eventually mean for the real estate sector,” he said.
Another demand driver for medical office space has been the shift of medical care from an inpatient to outpatient focus, the report stated. As hospital construction costs have skyrocketed to an estimated $1 million per bed, facilities are downsizing and outpatient care, health care offices in mixed-use projects and medical malls are growing in demand.
And that demand has spawned an epidemic of real estate investors taking a second look at the medical office sector.
Sam and Manal Khalil, local real estate investors, recently bought a building in Fort Worth’s Medical District, officially named the Near Southside, at 1025 S. Jennings Ave. – their first property intended for medical use.
Sam Khalil, who has several other local investments including retail and office, said he wanted to purchase the 16,000-square-foot building on Jennings since the medical sector of real estate is out-performing.
“I have other buildings, but they are not intended for medical use,” he said. “This building is good because of the demand in that area for medical use. My hope is to lease to one tenant that will use the whole thing.”
Though Fort Worth’s Medical District was once confined to a few smaller streets surrounding the hospitals in the area, that is no longer the case. Jim Austin, owner of Austin Co. Commercial Real Estate, has worked on developing and leasing medical office space in Fort Worth’s Near Southside for the last 20 years and has watched as the area has spread.
“The Medical District is a hot market,” he said. “There are a lot of doctors and medical providers looking for office space in the Medical District. It’s an area that has some strong interest from investors; people looking for opportunity.”
From doctors to medical equipment providers and other industry service professionals, Austin said he has seen a definite uptick in inquiries for medical office space.
“If I had a client looking for that kind of space, I used to just have to go out and look right around the [hospital] campuses, but now you’re having to go out to the edges of the medical districts to find good space to build a new medical office building or lease one.” Austin said. “It’s [nearly] expanded all the way to I-35. I don’t know what’ll happen when it gets there. I guess rents will go up or the area will have to expand in another direction.”
BY ALESHIA HOWE
