When observing the vast universe of commercial real estate, the opportunities for users and investors are varied, and can be utilized based on needs, risk tolerance levels, market conditions and political influences among multitudes of variables. There is no one-size-fits-all investment, and for a user-operator, there are always particular characteristics based on specific operational business issues.
No asset class of commercial real estate exemplifies that more than that of the healthcare sector. This expanding sector of commercial real estate is unmistakably bolstered by the aging Baby Boomer generation, most recently quantified as over 76 million people in the US. As we all know, an unfortunate element of life is that we typically require more healthcare as we age, so this industry is being driven by large populations of aging adults, in addition to most everyone’s typical healthcare needs.
User-operators are obviously doctors, but a huge emphasis on assisted-living facilities of all care levels has emerged as very beneficial to this aging community. Investors are injecting money into this industry in an attempt to provide these facilities as supply for the increasing demand. National brokerage commercial real estate power JLL is building out its health care practice as the sector as a whole continues to grow. According to JLL’s latest Construction Outlook, the sector recorded 26 million square feet of hospital construction completions and 12 million square feet of medical office building construction completions in 2018, and is expected to grow about 5% annually through 2025. To follow, we’ll describe different aspects of this unique sector from the perspectives of the investor, user-occupant, and developer.
Randall Commercial Group LLC is a boutique commercial real estate investment firm with a niche specialization in healthcare investment real estate. With multi state licensure, the firm works in nine Southeastern states out of offices in the Oxford, Mississippi area and Asheville, North Carolina.
Broker Elizabeth Randall explained the positive and negative aspects of investing in healthcare-related property”: “Healthcare demand is far less economically correlated than other sectors in the economy, essentially less likely to fail even during a bad economy, which lead the landlords of healthcare properties to reap the benefit. Further, healthcare spending has been rapidly growing as a percentage of GDP. The ‘Amazon/e-commerce’ is causing significant disruption to certain areas of the retail sector and is pushing former retail real estate investors to healthcare tenants instead”.”
Conversely, “Often healthcare tenants are smaller, private companies rather than larger public company tenants and the financial health of the tenant is less transparent.”
The author of this article would add that medical office buildings and clinics are highly-specialized, unique properties; so when tenants do vacate these facilities, often they aren’t as marketable without expensive retrofits for releasing. Randall specializes in a funding/investment strategy called the “sale-leaseback” which has proven useful to both the owners of the practices occupying these medical office buildings and the investment community.
A sale leaseback is simply a building owner/occupant selling their medical office building (MOB), at their discretion and on their terms, to a real estate investor while simultaneously leasing it back from that investor for a predetermined lease term – the owner cashes out of the ownership but gets to remain in the building as a tenant and control the property through the lease.
North Mississippi Health Services’ Vice President of Facility Management and Construction, Todd Davis, provides an outlook from the distinctive perspective of NMHS. NMHS are owners and managers of a total of 3.5 million square feet of medical facilities, of which 2.5 million square feet are located in Tupelo. Impressively, the occupancy rate for the entire footprint is hovering around 98%. Todd attributes this low vacancy to the goals behind the planning process involving NMHS leadership and its architects and engineers.
“The goal is to provide the most efficient and practical access points for patients to obtain our services. When planning, we take into consideration the potential adaptive-reuse, repurposing potential of the facility in question.” Very simple and powerful purpose resulting in very low vacancy for a huge facilities footprint.
Midtown Pointe Business Commons (formerly known as Gloster Creek Village) a 217,000 SF former retail mall, has been successful in providing full build-to-suit services and localized daily management to medical practices. The facility, which has been completely renovated since its purchase in 2012 is also 98% occupied including tenants such as the Cardiology Associates of North Mississippi; Urology Associates, the Surgery Clinic of Tupelo, the Orthopedic Institute of North Mississippi,and the Tupelo Plastic Surgery Clinic.
The Buyer / Tenant (User-Occupant)
Carr Realty is a national commercial real estate firm that has focused almost exclusively on the healthcare sector, and its brokers and agents represent only tenants and buyers in negotiations. Carr’s broker for Mississippi, Doug Price, said, “Every year, Carr represents thousands of healthcare practices on their lease and purchase negotiations, including start-ups, lease renewals, expansions, relocations, additional offices, purchases, and practice transitions, so we have a unique understanding of what it takes to increase a practice’s profitability through real estate.”
Very few healthcare practices understand the critical importance of commercial real estate and how it can be leveraged to increase profitability. More often than not, the highest expense for healthcare practices is payroll, followed by the cost of real estate, which encompasses your monthly rent or mortgage payments, along with the property’s operating expenses, maintenance fees, utilities, and janitorial costs.
When considering healthcare real estate options, there are many considerations to analyze. You have the choice of leasing or owning, as well as being in an office building, retail center, a stand-alone building, or large medical complex with many other providers. You can choose the size of your space, the design, and the landlord you want to work with – or to be your own landlord. And if you do own, you get to decide whether to buy an existing building, an office condo, or to develop your own building from the ground-up.
“Healthcare real estate negotiations are different than general commercial transactions given the importance of timing, higher buildout costs, the importance of access and/or visibility, office layout and design for patient management and other factors,” Price said. n