Medical providers are increasingly moving into traditional office spaces today. That’s not surprising, as office vacancies continue to rise. Landlords need to fill their empty spaces. They might be willing to offer lower rents as an enticement.
And those lower monthly rents are just as attractive to healthcare providers as they are to any tenant.
This is just one trend that Steve Brown, founder of Forte Real Estate Partners in Bloomington, Minnesota, has seen in the healthcare real estate market in which he has worked for more than 30 years. Brown says that this commercial sector is in the middle of several key changes.
And it’s up to the commercial real estate professionals working in this sector to not only understand the changes hitting the healthcare industry but adapt to them. It’s the only way for CRE pros to serve their healthcare providers.
Steve Brown, Forte Real Estate Partners
A changing healthcare market
Forte Real Estate Partners focuses on three primary commercial asset types, office, industrial and healthcare.
Brown said that healthcare real estate work is keeping Forte busy today. But this work is less of the straightforward transactional work that Forte took on 10 years ago. Today, Forte is handling more non-traditional work for its healthcare clients.
This means that Forte is spending more time on strategic facility planning for its clients. That’s especially true today as healthcare providers juggle the challenges of higher interest rates with the need to open new medical office buildings, ambulatory care centers and free-standing medical clinics to better serve their patients.
“We have been very busy from the standpoint of helping our clients understand today’s market,” Brown said. “Historically, when we had issues that impacted the healthcare segment, it was usually one issue. Back in 2008, our clients faced one major economic issue. In our world right now, though, there are several factors that are impacting the healthcare field.”
Rising interest rates have had a major impact, Brown said. The higher costs of borrowing money are making it more difficult for healthcare providers to take on needed expansions. Then there are supply chain issues. It is still difficult for contractors to get all the materials needed to build new healthcare facilities. This means it takes longer to build new clinics and medical office buildings.
“If you are doing new construction and you need switchgear, it might take two years to get that equipment,” Brown said. “That throws a major crimp in your schedule. It is challenging trying to get physicians groups to focus on the long-range planning it takes today to build a new facility.”
Then there are the staffing issues that medical providers face. Following the COVID pandemic, a high number of nurses and doctors have left the medical field. That makes it difficult for medical providers to staff all their facilities and might cause some to put expansion plans on hold.
Some healthcare providers have hired traveling nurses to fill the gaps in their staffing. That is a solution, but it’s not an inexpensive one, with traveling nurses commanding high salaries. This, too, can eat into the budgets of medical providers.
Brown says that healthcare real estate is now a food group by itself, joining the traditional asset classes of office, retail, industrial and multifamily. REITs today, then, are focusing more on healthcare real estate, and the investors that make up these REITs want higher profits. This puts additional financial pressure on healthcare providers.
“All these issues are bundling up on each other,” Brown said. “It’s an ‘a-ha!’ moment: It’s not just one issue that we are facing in healthcare real estate, it is multiple ones.”
Healthcare providers moving into traditional office space
Brown said that many healthcare providers in the Twin Cities area are moving into more traditional office spaces, space that wasn’t initially designed for medical users.
Part of the reason for this? The costs of building new facilities have risen so quickly that healthcare providers are looking to save dollars by moving into existing office space. And with vacancy rates so high in the office market today, healthcare providers are often finding lower rents by moving into space that has never housed medical uses before.
Brown said that Forte Real Estate Partners recently worked with five healthcare clients that moved into traditional office space. These tenants paid what Brown said were good rates for landlords used to traditional office rents but were a discount for the rents that medical users typically pay.
The challenge, though, is that not every traditional office space works for medical users. There needs to be enough parking for patients. Medical users also need easy access for their patients, meaning that their offices and clinics must be easy for patients to find. It helps, too, if these spaces are located directly off major highways or thoroughfares.
“This is something that was tried in the past, back in the ‘80s and early ‘90s,” Brown said. “Some of these moves are more successful than others. There has to be a strategy in place. Does the whole building have to be medical uses or is it OK if there are multiple types of users in a space? Does the building have adequate parking? You can’t go into a move to traditional office space blind.”
And that’s where Forte comes in. Forte works closely with its medical clients to make sure that they are moving into a space that will work for their practices, whether that space is a traditional medical office building or a space that has never been home to medical uses.
Brown points to a surgery center that Forte recently helped move into a traditional office building. The center featured plenty of parking, a plus. The visibility, though, was not as good as what medical providers usually enjoy. But back on the positive side, the move was, as Brown says, an economic homerun for the office building’s owner and a good value for the tenant.
In this case, the positives outweighed the negatives for the medical client, Brown said.
The biggest issues that medical providers face when moving to traditional office space are parking, infrastructure and the need for a high capacity for HVAC and plumbing, Brown said. If a traditional office building overcomes those challenges? Then the space might be a good fit for a medical user, he said.
“Those are the big issues,” Brown said. “If you go into a deal without knowing that or understanding these challenges, it could cost you a lot of money.”
Another good example of a medical provider successfully moving into traditional office space? Forte helped Skin Rejuvenation Clinic move from its 7,567-square-foot space in the Southdale Medical center to a new 10,000-square-foot location on the ground floor of France Place at 3601 Minnesota Drive in Edina, Minnesota.
Brown said that the new space boasted plenty of positives for the clinic. The building offered a first-floor location. Skin Rejuvenation Clinic has its own entrance at the property, and the clinic gets its own sign above the door. The building is also in a location that is easy to find and access.
As Brown says, it was a wonderful fit and a good example of a successful medical provider move to traditional office space.
Staying put brings its own challenges
Because of the higher costs to build today, many healthcare providers that might have moved are opting to say put and remodel their existing space to better serve their patients.
This, though, comes with its own set of challenges.
It’s expensive to build new. But the rising costs of both labor and materials mean that it is expensive to remodel, too. Remodeling also puts strain on staffers and patients if a clinic or office is trying to remain open during renovation work.
Brown said that the key to a successful remodel is for healthcare providers to hire talented architects and contractors. These professionals can then break down the project for a medical provider, outlining when each phase of construction should occur to generate the least amount of disruption.
“Even though the cost of renovating a space has increased, this is still a far more affordable option than building new space,” Brown said. “Renovating or building new space is a delicate balance. You want space that is professional and clean but not space that is ostentatious or overboard. You want to have an architect that understands that and can design a space that looks nice but is not overdone.”
A recovery from the pandemic?
Healthcare providers suffered during the pandemic, often cancelling elective or non-essential procedures.
Today, patients have returned. But that doesn’t mean that healthcare providers aren’t still suffering from the pandemic’s impact, Brown said.
He pointed to the staffing challenges that healthcare providers face. There simply aren’t enough nurses and physicians to meet the demand for medical services today.
“Where did all the people who were working go?” Brown asked. “It’s not just nurses, either. Staffing in general is hard.”
At the same time, medical providers that lost money during the pandemic years are now scrambling to boost their bottom lines. That means many are operating on razor-thin margins. Many of these healthcare providers are also operating in older buildings that need upgrades.
With the financial challenges these providers face, will they move to new space, renovate existing space or remain in outdated facilities to save money? Brown said that the healthcare real estate industry is waiting to see how it all plays out.
