Rx for MOBs

Strong Property Managers

By Paul Rosta on Sep 11, 2013 in News

As the population continues to age and more medical office buildings come online in response, demand for management services is expanding. But this is not your typical commercial property management. Owners, operators and managers must be able to adapt to a rapidly changing environment.

“The healthcare landscape is changing all the time, technology is changing all the time, needs of office space are changing all the time,” noted Christopher Merrill, president & CEO of Harrison Street Real Estate Capital. Healthcare and seniors housing assets account for about 50 percent of the company’s portfolio.

This year alone, 10.3 million square feet of new medical office buildings will come online, a 2.5 million-square-foot increase compared to 2012, according to a study released in late May by Marcus & Millichap Real Estate Investment Services Inc. By 2016, demand for medical office buildings will increase by about 20 percent, according to an estimate by the Urban Land Institute; demand for space will increase by 64 million square feet during the next decade.

Today’s new breed of medical office buildings is characterized by designs that promote efficient use of space, data sharing and improved interaction between medical staff and patients. End users are gravitating toward this newer product, a preference that is skewing leasing trends. Medical office facilities completed since 2007 have rung up about 8.3 million square feet of positive absorption during the past year. MOBs built before 2007 have fared considerably less well. As of the first quarter of 2013, pre-2007 MOBs had sustained negative absorption in six of the past eight quarters, Marcus & Miillichap reported.

As with other property categories, management strategies for healthcare facilities vary widely. Health Care REIT Inc. manages its 1,133-property portfolio of healthcare and seniors housing in house. Other investors, like Harrison Street, like to retain third-party consultants to manage their properties. “It’s the local relationships our partners have with the doctors and the hospitals,” Merrill explained.

As specialists point out, though, managing healthcare facilities demands unique technical knowledge of the service provider. For one thing, hospitals and other healthcare facilities demand strict attention to meeting the regulatory standards established by the Joint Commission, the non-profit organization that accredits hospitals. Owners increasingly turn to consultants for assistance in meeting accreditation standards, pointed out Jim Hayden, executive managing director of CBRE Inc.’s healthcare services group.

Owners and managers of MOBs must also face the challenge of complying with a complex series of federal regulations intended to prevent conflict of interest in physician referrals to hospitals. Collectively referred to as Stark law, the rules include provisions covering medical office leases. For instance, Hayden noted, “a hospital cannot lease space to a physician or a group at a rental rate that’s less than market rate to entice physicians to come to the hospital and provide services that are covered by Medicaid or Medicare.”

Since MOB tenants are focused on patient care, many are unaware of the new generation of tools that enable them to manage the business side of their practices. This, too, presents an educational challenge for their consultants. “So many hospitals and medical providers have not invested in software applications and technology that enable people to become more efficient and proactive in their work,” Hayden explained. “A lot of them are looking to us to bring that technology to them.” One area where healthcare property managers often encounter a learning curve is energy. Functioning around the clock, hospitals use more power than most commercial buildings.

At medical office buildings, the constant use of sophisticated equipment often translates into costly electric bills. Energy audits and opportunities for monitoring that can yield savings are standard for healthcare property managers; implementing those new tools, however, may call for client education.

Whether healthcare facilities will eventually rank among the major commercial real estate groups remains uncertain. But as demand for outpatient services increases, there is sure to be plenty of need for effective property management services.

Paul Rosta is senior editor for Commercial Property Executive. A more complete version of this article, including insights into hospitals’ role as owners and operators of medical office properties, appeared in the July 2013 issue of CPE.