Healthcare: Snapshot for Medical Office Buildings Sector- Bergen County, NJ

by Darren M. Lizzack, MSRE for New Jersey Commercial Real Estate Alliance

Snapshot for Medical Office Buildings (MOB) for Bergen County, NJ – What does the future hold for this unique sector?

Back in January (2009) I shared information with readers with respect to Investing in Medical Office Buildings and I thought it would be interesting to look back and see how things have moved forward almost two years later.

In that article, I briefly discussed out-patient surgical centers and why they came to be so popular. Today, it seems as though the lobbyists for the hospitals are in the lead given the moratorium on outpatient surgical centers has been in place since September 2009 coupled with insurance companies reimbursements on the decline for procedures performed at these outpatient facilities. Given the elections last week and the blow to “Obama Care,” it is going to be very interesting to watch the healthcare industry sector going forward. I am aware of 9 surgical centers in NJ that are on the market today simply because they are no longer reaping the benefits (the large pay-days) they once had given the competition and successful lobbying done by the hospitals; the income generated from these outpatient care facilities [today] exceeds the cost at which these facilities need to operate (no pun intended). I may not be the smartest person there is, but I believe doctors and surgeons alike need to create their own lobbyists to create balance in the system once again. These facilities were once very attractive given the reimbursements for procedures would cost the insurance companies far less than if the same procedure was being performed in a hospital, and at the same time, offered doctors more money than they would receive if they performed their surgery onsite at the hospital. Today, the doctors are gravitating back towards the hospitals despite the great advantages of having these outpatient facilities. And what will happen with all these operating facilities that are no longer filled with surgeons and patients? My guess is that there will be a swing back in this direction at some point down the road and whoever gets on this bandwagon going forward will reap the benefits given their ability to get into the game with a much lower up-front cost.

How is the rest of this sector holding up today in Bergen County?

Supply

Have you driven down either of the main retail arteries in the heart of Bergen County lately? Have you seen what is happening along Routes 4 or 17 and noticed anything strange? I am sure you know there are more available buildings than you have seen in the past 20 years. You would think the number of availabilities in the retail sector would apply to all sectors, however, this could not be further from the truth; especially when you think about Medical Office Buildings (MOB) in Bergen County. If you look at the graph of vacant available space, it appears the vacancy rate is on the rise, however, the amount of vacant space has grown by less than 100,000 sq. ft. since the first quarter of 2009. In retrospect, there is currently approximately 30 million sq. ft. of available office space throughout NJ. Therefore, there is a large misconception with respect to how volatile the market is for medical office space in Bergen County today. And if you are one of the medical practitioners that have been looking for space in any particular geographic location, I know you have limited options which also have merit for you and your business needs.

Demand

I am sure you are more aware than I am of the staggering figures of baby boomers that are just on the cusp of retirement. Did you know that fewer doctors are graduating from medical school today in comparison to the number retiring? Do you think the aging population is not going to demand more/better healthcare in the future? The baby boomer generation has access to a lot of capital and don’t you think they are going to require more medical attention during their retirement years? Do you think they aren’t going to try and take care of themselves to live as long and as healthy as humanly possible? I know everyone has been nervous of our president’s goal of changing our healthcare system to something that many would agree is less than desirable for our country although if you look back in time to the Clinton administration (last time we had a democrat president in the Whitehouse), you can make the correlation as to what is happening in healthcare today as being similar to that happened with education in the late 1990s. The government focused on making education available to everyone and anyone that wanted to pursue their dreams of becoming educated so they can enter the work force and earn a better living. In short, during the Clinton years, money and resources poured into education. In retrospect, the only thing that Clinton accomplished was raising the bar for education. It was not as prosperous to simply have a college degree anymore and in order to set yourself apart from the masses you had to further your education beyond your college years. The point I am trying to get across is that for good, bad or indifferent, like the late 1990s for education, I foresee the same thing happening with healthcare; resources are going to pour into this sector. The general practitioners are the ones that will suffer the most although it will force many of them to further their education and specialize in the area which they feel they may excel. And the ones that remain as general practitioners will figure out ways to take advantage of the few leftover; in other words, they will end up making an honest living. Now that I have given you some ideas of what I believe is going on right now, tell me whether or not you believe there will be increased demand for medical office space in the future for Bergen County, one of the most wealthy counties to live in throughout our entire country?

Price

The average asking rental rate for Medical Office space in Bergen County is relatively flat, hovering around $27.50 per sq. ft. gross (not much different since 3rd Quarter 2008). I am hopeful to have painted a very different picture for you when you think about how “bad” the real estate market is today. To give you an idea, retail space along Route 17 in the Paramus area was close to $50 per sq. ft. a couple years ago. Today, you can lease space along this corridor in the mid $20’s. The other thing you must understand about pricing is the capital medical practitioners require in order to get their space ready for their intended purpose; it’s very expensive to open up a medical/healthcare facility today. Therefore, you don’t see the volatility in this sector like you do for general office or even the retail sector. A doctor who needs a couple thousand square feet for their practice can easily spend north of $100 per sq. ft. (not including specialized equipment) in addition to any work letter any landlord is going to be willing to provide.

Until now, I have only mentioned pricing in terms of rental rates. Let’s focus for a moment on purchasing medical office space in Bergen County. If you have been in the market to purchase space for your own medical or quasi-medical use in the past two years, I am sure you found your options somewhat limited. The reason being you cannot simply take any office building and convert it to medical. You have zoning issues to worry about, infrastructure issues, and most important, parking. Most doctors I come across do not think about these things when they say to themselves, “The market is terrible today and perhaps I should consider buying something rather than continue to pay all this money to my landlord each month!” If you think asking prices for medical office buildings in Bergen County will continue to be rather high, which I sure do, perhaps you can now understand exactly why this is so. And do you think this will change at all going forward? In my opinion, the simple answer is no.

What does this mean for you, doctor?

In my professional opinion, this means that demand will continue to increase for medical and healthcare professionals in the foreseeable future. I also believe that demand will increase faster than supply for this type of real estate product, especially in Bergen County NJ. I also think the cost to build these facilities will also continue to rise. Today, doctors can take advantage of all-time low interest rates and lenders still want business from doctors. Truth be told, they are low risk and they repay their debts on time; what more could the bank ask for in terms of a client? You have to learn to adapt to your environment to the best of your ability under any circumstances. The bottom line is you can, and you should, take advantage of a unique opportunity if and when it presents itself; if you don’t, you will be sorry. I believe capital and resources will continue to pour into the healthcare industry as a whole, and you need to get on the ball now if you are going to ride the next wave that is gaining momentum even as you read through this article right now.

When it comes to identifying and securing space for your needs, I encourage you to engage someone with the expertise, knowledge and understanding of your specific needs. The most important thing is to have someone in your corner to help you accomplish your goals in a timely fashion. I believe in the healthcare sector and I am confident it will continue to thrive over the next ten years or more. Before doing anything real estate related for your practice, you need to engage someone who can help walk you through this exciting and nerve wrecking experience. You may or may not choose to work with me, but you will thank me for this advice if you decide to take it. You may also read more articles that I have written over the past two and a half years by visiting me here; you may also contact me at dlizzack@naihanson.com This e-mail address is being protected from spambots. You need JavaScript enabled to view it and I will follow up with you at my earliest opportunity. Thank you for your time and I hope you enjoyed this month’s article.

[njcrea.com]

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