medical buildings

Roundtable: What’s new in medical building trends?

Bioscience and healthcare industries continue to thrive in Arizona with the facilitation of unique and collaborative ways to implement new products, innovations and improve overall care and treatment.

According to the Arizona Commerce Authority, healthcare employers in the state are outpacing their national counterparts and other types of industries. The ACA reports, “In 2015, healthcare employers in Arizona added more than 11,000 jobs, a rate of 3.4 percent. That’s faster than either healthcare employers nationwide (3.2 percent) or Arizona employers as a whole (2.5 percent).”

Most recent data from 2015 shows the healthcare industry accounts for 320,028 jobs in the state, which produces a total of $21.4 billion in total annual earnings.

Some of those jobs are held by healthcare professionals, experts and industry leaders who shared their thoughts and insights on healthcare in Arizona in a virtual roundtable with AZRE.

Tempe

Rendering of the Tempe Biomedical and Technology Campus the city recently picked developers for. (Rendering courtesy of the City of Tempe)

While expertise and areas of interest vary among them, a common thread shared by all is the goal to improve the quality of healthcare for the more than 5.6 million people in Arizona.

They discuss the latest trends, shifts in market demands, the hottest submarkets and what to expect in the future. Panelists are, in alphabetical order:

Sheila Bale, managing director, Newmark Grubb Knight Frank: Bale has 16 years of experience in the marketing, sales and leasing of office and medical space and has facilitated more than 400 office and healthcare real estate transactions and projects.

Tim Bricker, president and CEO, Chandler Regional and Mercy Gilbert Medical Centers: Bricker has more than 20 years of healthcare experience and most recently served as a consultant helping hospitals around the country develop strategies and improve their operations.

Kip Edwards, vice president of development and construction, Banner Health: Edwards has more than 30 years of experience in the planning, design, construction, management, and operation/maintenance of healthcare facilities, which includes more than 22-million square feet of new construction and renovations for medical facilities, totaling in excess of $12 billion in project expenditures.

Patti Gentry, Keyser Healthcare: Gentry has more than 30 years of experience representing clients in all aspects of office and medical space.

Sharon Harper, president, CEO and co-founder, Plaza Companies: Harper oversees all facets of company operations, including the ownership, development, leasing or management of nearly 10 million square feet of Arizona medical office properties, senior living facilities and bioscience/biotechnology centers.

Julie Johnson, principal, Avison Young: Johnson has 25-plus years of experience in the healthcare real estate industry for both medical office and senior-living clients, including leasing, sales for investors and owner/users and site selection.

COMING TO ASU: McCarthy Building Companies recently broke ground on the new $120 million Biodesign C Research Building, the third building in ASU’s Biodesign Institute complex at Arizona State University. (Rendering courtesy of McCarthy Building Companies)

COMING TO ASU: McCarthy Building Companies recently broke ground on the new $120 million Biodesign C Research Building, the third building in ASU’s Biodesign Institute complex at Arizona State University. (Rendering courtesy of McCarthy Building Companies)

AZRE: What are the “must haves” for any new, top-tier healthcare development?

EDWARDS: Flexibility to evolve as healthcare transforms. Today’s needs that match our current “sick care” system (get sick or injured, we cure you and send a bill) is evolving rapidly to true healthcare or population health management (pay a flat rate and we assume the risk for your health). Today, we may need to invest in hospitals and clinics to provide care. While we will still need these in the future, we will need much more to extend care to a population such as urgent care, walk-in clinics, virtual appointments, etc. Therefore, the number one “must have” is flexibility to evolve today’s facilities to the future configuration and needs.

BRICKER: An integrated healthcare network that offers top-level services at convenient locations for our patients. That is why we are expanding into additional services and locations, such as freestanding emergency departments, a new rehabilitation hospital and an increasing number of physician clinics. When considering these facilities, we take in mind flexibility of space for continued change and adaptation, creating a healing environment in which physical space contributes to the well-being of our patients, and infrastructure for fast data movement and connectivity.

HARPER: Successful top tier healthcare developments require that the delivery of healthcare is convenient and accessible to the patient. It must be positioned effectively, efficiently, and recognize the importance of the provider, the surrounding community and insurance plans. The healthcare industry is changing rapidly and will continue to do so, making it critical to continue to add innovations and take advantage of technology.

BALE: The most important factor is location. It must be located near many residential houses, and near or adjacent to a major freeway or road. Many specialists will want to be within five miles of a hospital. Interest in leasing is much higher when doctors/providers know their patients can easily find them.

JOHNSON: Technology – digital radiology, electronic health records and many other electronic forms of communicating healthcare diagnostics and data take state-of-the-art technology in buildings and high parking ratios. Signage and visibility – these retail type factors play a large extent for a new Class A medical office development. Proximity to major transportation corridors – important so healthcare providers can offer care easily to patients in all parts of the valley and also is easier for their doctors/providers to travel from one facility to another.

GENTRY: Traditionally MOB’s (medical office building) have consisted of clinical suites for private physicians, ranging in size from 1,000-20,000 square feet. The MOB’s of today are being designed in a larger footprint with more flexible exam spaces, so that multiple healthcare providers can utilize a single space, since many of the service lines are being delivered by these large groups in one location. Flexibility is the key to the financial success of future MOB’s.

low-margin-business

AZRE: What are the biggest challenges to consider when developing new healthcare projects?

HARPER: Plaza Companies creates a cohesive development and construction team that plans and designs buildings with a premium on flexibility in access, signage, entry points and parking. It cannot be underestimated the importance of getting all of these factors right. Expectations for pre-leasing are critical in most commercial office buildings, and that includes medical office buildings as well. It is more complicated for medical groups to commit 18-plus months out for new space. Medical practices also need the ability to be flexible and responsive to new federal regulations, insurance requirements and relationships with healthcare institutions.

EDWARDS: The facilities we need to support healthcare today are not what we will need in the future. We need to continue to invest in today’s care to keep the enterprise going and financially successful but also need to invest in the future needs. These don’t necessarily have a good payback today. This is taxing a shrinking capital pool and making project investment decisions very difficult.

JOHNSON: If not zoned correctly, going through the rezoning and neighborhood “feedback”. No. 2, a developer with a new MOB typically needs to get the building 50-75 percent preleased before they can get financing to start construction. Many healthcare providers don’t want to commit their business by signing a lease when they don’t know when the threshold will be reached for construction to start and a firm occupancy date.

BALE: The biggest problem is what limitations exist that inhibits who you lease to. The pool of available physicians and service providers drops significantly when a developer builds on leased land from a hospital. Also typically they can only lease to physicians who are on staff at the local hospital. The ideal situation is on privately owned land halfway between two or three different hospital systems. Tenants will lease there because there are no restricted uses and providers can serve more than one hospital system too.

GENTRY: Location is the biggest challenge to overcome when planning a new healthcare development. New MOB’s need to be located on or near hospital campuses, where the providers can benefit from proximity to multiple service lines, and perhaps more important, provide a consistent stream of referrals to the hospitals. Also of note, the other challenge today’s developers are facing is that, although financing for new developments has loosened up, most lenders will not finance a development that does not have significant tenant commitment of at least 50 percent.

BRICKER: I think it is safe to say that the biggest challenges are capital and the risk of unknown change in the market or industry.  We are a not-for-profit organization and we don’t always have the funds we would like for expansion.  That said, the care we provide at Dignity Health is outstanding.

new-utilization

AZRE: How have market demands and healthcare needs shifted and why?

BALE: The largest shift was in the last five years with the Affordable Care Act. The typical physician office of 2-3,000 square feet is now 5-7,000 square feet since the physicians either joined hospitals or they joined other groups of similar specialty so they can financially bear the burden and handle the risk as a group. The overhead costs are shared among a larger group of physicians; hence the space is larger for the practices.

BRICKER: Many medical procedures that once had to be undertaken in an acute care hospital are now conducted in outpatient facilities.  This shift, along with a desire to make health care more convenient and demands for speed and easier access, has created the growth of new clinics, urgent cares and other outpatient facilities. In addition to providing specialized inpatient care, we are also focusing on wellness and prevention, which leads to the creation of more outpatient medical settings.

EDWARDS: They have shifted dramatically. Technology, new drugs, and medical management have greatly reduced hospital stays (number and length). Reimbursement changes have also had a big impact, as there has been ongoing pressure for many years to lower the cost of healthcare (or reduce the rate of increase). As a result, there has been a continuous shift of care to the outpatient setting. The advances in technology, drugs, etc. have facilitated this.

JOHNSON: There’s the shift towards medical providers in retail malls/centers. There’s a shift toward outpatient settings rather than inpatient, which creates less expensive surgeries, more outpatient surgery centers and fewer hospital stays and the need for fewer hospital beds. There has been a lot of urgent care facilities popping up since Affordable Care Act (Obamacare) to guide ill but not critically ill patient there.  Dignity has partnered with Adeptus Health, which has urgent care facilities and even small hospitals. Banner last month bought over 30 urgent care facilities.

GENTRY: Over the years, the market demands for healthcare have shifted 180 degrees, and this evolution continues on an almost daily basis. Considering the 2012 Supreme Court ruling on the ACA, and the certainty that millions of people now have some form of insurance, the healthcare climate is one that requires more medical care to be delivered, in a less expensive and more consistent manner. This pressure has empowered healthcare providers (and patients alike) to become more reliant upon technological innovations as an aspect of patient care, and shifting their practice models to “coach” patients back to a state of wellness by utilizing these tools.

HARPER: The healthcare real estate sector has been nothing short of dramatic in terms of change. The healthcare industry needs to factor in end users, innovation, vacancy and occupancy rates, affiliations, mergers, acquisitions, federal and legislative mandates, and pricing. There are abundant tail winds that are driving demand and dramatically and rapidly changing the healthcare industry, starting with the Affordable Care Act. Plus, healthcare innovations and technology are changing the very way care is provided to patients across the spectrum, as well as the real estate needs of physician groups and hospital groups.

AZRE: Where do you see the most significant healthcare development in the Valley?

GENTRY: Healthcare development is currently taking place at a very active rate throughout the entire Valley. The largest healthcare providers are focused on capturing patients from all socio economic levels, despite the location of the parent hospital campuses or parent networks. Large amounts of additional MOB space will be needed during the next decade to accommodate for increasing patient demand for health care, across all service lines.

BRICKER: The key hotspots are locations within the East and West Valley, where there has been an abundance of population growth. In the East Valley we certainly have seen a significant expansion of healthcare, which includes our new freestanding ERs, our new rehabilitation hospital, a new cancer clinic and a number of new physician offices.

HARPER: We anticipate healthcare being delivered in more of a “retail” setting, with more providers focusing on quick, efficient interactions with patients that allow for easy access to medical care. Developers of medical office properties must plan for this moving forward to ensure patients are receiving the kind of care they want. We also see accessibility to care as a major factor, and anticipate more development around hospital campuses with freeway access and a broad variety of practices in the same setting.

BALE: The most significant medical office projects are in the West Valley now. Westgate Healthcare Campus is planning to build 230,000 SF of office adjacent to St. Joseph’s Westgate campus. Also coming out of the ground there is 60,000 SF of medical office as part of the St. Joseph’s Westgate campus. Also on the west side is a mixed-use project of retail and medical. Pre-leasing is going on for a 90,000 SF medical office building, Park 10 Medical Center, which will provide Class A office space for providers without restrictions on specialties and provide a new amenity for healthcare, signage on the electronic billboard along the I-10 freeway.

JOHNSON: With medical being a service industry, it has grown with the population. It’s driven mostly by a gap where healthcare isn’t provided sufficiently based on demographics or providing community wellness care easily to residents in a community again focused on easy access, very visibly, creating branding and name recognition for the provider.

EDWARDS: No one place in particular, although it will continue to grow in the areas of greatest population growth, usually marked by homebuilding.  The bulk of the development activity will be spread throughout the Valley as care facilities such as clinics, urgent care centers, and others are extended closer to the communities they serve.

AZRE: What should we keep an eye on for the healthcare market over the next five years?

EDWARDS: There will be a continued decrease in demand for the small, private practice offices and a growing demand for larger clinic spaces, 20,000 SF and greater, that can accommodate group practices.

BRICKER: Healthcare providers are starting to focus on well care rather than sick care. As a result, I predict we’ll see more wellness, prevention and lifestyle management settings to keep people well and manage chronic disease.

JOHNSON: With cost pressures to reduce healthcare costs any way to make it more efficient and still provide good quality care so the patient is kept well and happy.

BALE: I think we will see a huge demand for physicians to be located in Central Phoenix. With all the urban development for housing within the city, the needs for physicians will increase to level that the current practices will not be able to handle. People inside the urban core do not want to drive to the suburbs or go to the ER to see a doctor. These are all in the high traffic areas of Phoenix, Scottsdale, Tempe and Chandler.

HARPER: The industry will undoubtedly see more of a focus on collaboration over the next few years. Plaza Companies understands the distinctive advantages associated with strategic partnerships and collaborations, whether it is hospital system, municipality, a university or a large medical practice.

GENTRY: Looking forward, healthcare providers must keep an eye on quality of care when treating higher acuity cases and move the lower acuity cases out of the hospitals, into more cost effective ambulatory settings. A shift toward treating patients more commonly in an ambulatory setting coupled with increasing demand from the consumer (patients) will result in the need for large amounts of additional MOB space, as vacancy rates remain low and rental rates continue on a slow but steady increase. Medical space will continue to evolve to embody a more flexible concept, with larger floor plates, to combine primary care, specialty clinics, imaging, labs, social services, pharmacy, rehab and even ambulatory surgery, all under one efficient roof.

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