Strong demand for health services drives the development of medical practices

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America’s aging population continues to drive demand for medical services, which, in turn, helps fuel activity in the medical office development pipeline. This adds to an equally robust market for investment sales for the sector.

The industry saw $7 billion in capital investment in medical operations in 2021 and expects to see much of that in 2022, according to Todd Perman, vice president of global health services for Newmark. This leads to a demand for additional space and buildings.

“Health care is one of those high-demand services that you end up with, that even when you go into a recession, you’ll see people focusing on their health,” Perman says. “This speaks well for the medical practice and other healthcare-related industries.

Regarding the concerns of people getting their care over the phone or the internet, Shawn Janus, national director of health services for Colliers, says telemedicine was 1-3% of the market before the pandemic and soared to 50 in 70%. , depending on the specialty. It’s down to 17% now and should settle in the teens, he says.

“You still need to see your doctor and have that touch and feel between patient and provider,” says Janus.

Lee Asher, who leads the healthcare and life sciences capital markets team at CBRE, adds that the outlook is favorable even in an inflationary and recession-prone environment. . The medical practice sector has performed well during the global financial crisis and the pandemic, he says.

“I think there will be a lot of focus both on tenants and on the medical office sector itself as where the capital wants to deploy its money,” Asher says. “There is also a growing need, especially in Sunbelt states that are experiencing population growth like Texas, Florida, Tennessee and Colorado, where you see an influx of people. This population has default health care needs and this will drive demand for providers to continue to grow and expand their practices. It is very favorable in the next 12 months.

During the pandemic, many of the large health systems and physician groups that would otherwise have been in the market taking up space have stalled, Ives says. He sees a lot of things playing out in the future.

“All of this demand for one to two years that would otherwise have been there will likely catch up,” says Travis Ives, executive director of Cushman & Wakefield’s who leads its US healthcare capital markets team. “We’ve already heard from developers that their pipelines are pretty full and health systems are putting all these projects back on the table. I think you will see active development adding new stocks across the country, especially in the smiling states. It will be pre-let and will not add much vacancy to the market. Vacancies will be low and rent growth will continue to occur and there will be more development and more office to medical conversion where it makes sense.

There were 703 medical office building projects under construction to start the year, totaling 50.4 million square feet, up from 44.2 million square feet 12 months earlier, according to Colliers. These projects were concentrated in off-campus facilities that tend to be smaller and provide easily accessible locations and outpatient clinics to accommodate the shift away from inpatient hospital care, Janus says. Doctor’s office completions fell in 2021 to 19.5 million square feet after completing 22.6 million square feet in 2020, according to figures from Colliers.

Analysts said the focus in new construction has been on smaller buildings with fewer tenants so patients can easily move in and out of the complex. The pandemic has accelerated the trend of patients not wanting to be on a hospital campus for fear of catching diseases.

“They want something less cluttered and more convenient,” says Bryan Lewitt, JLL’s general manager of healthcare in Southern California.

Asher says another reason practices are leaving campus is because there are fewer restrictions. Physician groups want flexibility in marketing and branding, and moving into a retail-focused building provides visibility and allows for signage, he says.

Some practices even go into available office space if it can be converted, analysts say.

Doctor’s offices are designed to use less space and deliver the same care more efficiently, Jacobson says.

“You have staff in the middle and a hallway that looks like an H so staff can cut through areas with exam rooms outside,” Jacobson says. “They want to reduce the number of steps taken.”

Healthcare systems are also looking to reduce their administrative footprint “quite dramatically,” perhaps by 30 to 50 percent, Janus says.

Todd Perman, vice president of global health services for Newmark, says he doesn’t expect hospitals to use general offices as much in the future when employees can work from home.

“For their back office, they can no longer rent space,” says Perman. “We have seen this with many of the hospitals that we advise. They gave up their headquarters and reassigned it to a medical practice or got rid of it all together.
Perman says the days of small offices with different doctors in multi-tenant buildings are also fading. They see larger blocks of space that are occupied by larger practices or hospital practices.

“We’re also seeing a trend in private equity-backed groups looking to scale on a broader base with larger specialty groups and primary care groups and adding specialties,” Perman said. “It brings together a puzzle between the four walls of a building rather than separate spaces for each doctor’s office.”

“Private equity is the source of a lot of tenants, and they’re keeping the market going as many health systems have paused their growth plans as they had to deal with the pandemic,” Lewitt added.

Ives says one of the biggest trends to watch is how the pandemic has changed where people want to live, whether it’s leaving an urban area for the suburbs or migrating to the Sun Belt. and other localities.

“They built a system around where people live and work, and the pandemic created a catalyst that prompted people to move to metropolitan areas and other parts of the country,” says Ives. “The healthcare industry is not known for moving fast, but now it needs to catch up to maintain its market share and serve this population. This is a topic that has been talked about for some time in traditional offices, with employees moving to the suburbs and no longer going downtown. Now, the same theme will also play out in doctors’ offices. I think you’re going to see health care providers start to expand their services into the suburbs where they might not have been so aggressive in this growth strategy had it not been for the pandemic and the resulting population dislocation.

California, Florida, Texas, New York and Ohio had the largest area under construction with 12 metropolitan areas having more than one million square feet of construction to start 2022, according to figures from Colliers. Houston led with 2.4 million square feet, followed by Chicago and New York with 1.7 million square feet each. Orlando is experiencing the biggest boom with 1.6 million square feet under construction representing 13.7% of the market while the national average is 3.3%. Columbus and Baltimore follow with 9.6% and 7.8%.

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