VIP Structures has been heavily involved with medical office space since 2004 when it purchased a then-vacant property at 1304 Buckley Road (Syracuse) with the intent to develop it into a Class A medical office building. After undergoing complete renovations, the space is now a successful medical facility with 96% occupancy managed by VIP Development Associates, Inc. It currently includes a nephrology practice, laser eye surgery unit, cataract surgery practice, 24-station dialysis clinic, homeopathic general practitioner, and other medical practices.
During our involvement with medical office space, there has been a rising demand for such space across the country. That demand has been driven by a number of factors such as an aging population, advancements in medical technology that make more treatments available and allow more procedures to be done outside of a hospital, and increased healthcare utilization brought about by the Affordable Care Act.
At this writing in June 2017, the long-term status of the Affordable Care Act or its potential replacement remain unknown, but many policy experts agree that a rollback of the legislation would take years to implement. In any case, the increasing demand for medical services and, by extension, medical office space is not likely to subside in the near future.
To put the current outlook into context, consider that U.S. spending on healthcare was $3.4 trillion in 2016 and the Centers for Medicare and Medicaid Services projects that figure to grow to $5.5 trillion by 2025. Commercial real estate firm Colliers International reports that the national vacancy rate for medical office buildings was at an all-time low of 7.4% at year-end 2016; and that new construction of medical office building space was estimated to exceed 22 million square feet, falling just a little short of the peak of 24.9 million square feet in 2008. In short, signs point to growth in the demand for medical office space.
While the need for medical office space grows, the choices facing practices that are looking for space are varied and sometimes complicated. Since rent will be one of the most significant costs for a practice, it’s important for potential tenants to consider a variety of factors before making a choice about what medical office space is right for them. Here are just a few important considerations:
#1: Location
Arguably the most important factor in any real estate decision is location, and medical office space is no exception. It is desirable to be in a location that is highly visible and has easy access to highways and other arterial roads. Some may argue that those factors are less important to a medical office than a traditional retail business, but the easier it is for patients to find the practice and get to a location, the better the chance for long-term success.
When shopping around for a space, practices should try to obtain data on traffic patterns and distance from major routes. They should also evaluate the visibility of the property and the general environment of the area surrounding it in terms of aesthetics, types of businesses or residences in the area, safety, etc.
Being in close proximity to hospitals, labs, complementary specialties, and pharmacies is also important. With the current emphasis on collaboration between medical providers and each provider being part of an overall continuum of care, being close to other healthcare entities makes it easier for practices to form partnerships and increases the possibility of “one-stop shopping” for patients.
#2: Patient demographics
In many ways, the question of patient demographics goes hand-in-hand with the location decision. Patients naturally prefer to visit medical offices close to where they live or work. It is important to understand the age, income, education levels, and other demographics since they largely determine the neighborhoods where those patients will be located in a given market. It can also impact the type of space and accommodations expected by the patient base. For example, a highly affluent patient population may expect cutting edge facilities, extensive amenities, and lots of external “curb appeal”, whereas a blue collar population might be comfortable in a less lavish space.
Part of the demographics equation isn’t just the composition of the current patient base, but identifying potential growth areas and projecting what the patient base might look like in the future. Population demographics are a moving target and are constantly changing, so to the extent that it is possible, practices should try to anticipate trends and plan ahead.
Of course, many practices won’t have the time or resources required for a demographic analysis. Commercial real estate firms may be able to help in that regard as they usually have access to basic demographic data about the market. If a practice is trying to cater to a highly specific demographic audience, it may be worth the money to hire a market research firm to conduct an analysis.
#3: Building type
Medical office space is available in a variety of building types including stand-alone buildings, hospital-owned properties, office parks, and even in strip malls and retail storefronts. All of these location formats have their plusses and minuses. They vary in terms of accessibility, parking, foot traffic, prestige, the degree to which the setting feels “clinical”, potential for tenant improvements and build-outs, and the extent to which they offer discretion for patients who may desire privacy when entering some types of practices. There is no one right answer and each practice has to weigh which of those factors are most important and how well a particular building type meets those priorities.
It is likely that when practices look for medical space, they will encounter office spaces designated as Class A, B, or C. These terms can be a bit confusing to those who don’t deal regularly with commercial real estate because there really aren’t exact definitions of what distinguishes a Class A space from a Class B or C. The separations are a bit relative and more of a continuum than distinct buckets.
Generally speaking, Class A buildings are the most prestigious in the market. They will have higher quality finishes, the most advanced building systems, better accessibility, and very prominent spaces in the market. They will also have higher rents. Class B properties are what might be considered “good” or “above average,” are more affordable than Class A but are not the best in a given market. Class C is what might be categorized as “no frills” or “functional,” and tenants sacrifice aesthetics, location, accessibility, and/or other considerations in exchange for lower costs. This is another case where there is no one right answer. Patient demographics and the image that the practice wants to convey to the public should inform the decision. Being located in a Class A space will certainly offer prestige and credibility to the practice, but some practices might flourish in a space that is below Class A.
#4: Competition
There are a lot of reasons why it’s important for a practice to have thorough knowledge of its competitors in the market, and making an informed decision about office space is one of them. In general, it is better not to be located in a space close to other practices in the same field. That can lead to patient confusion (potentially mistaking one practice for another) and will prevent a practice from fully realizing the benefits of a location.
It is worth taking the time to research which, and how many, competitors are near a location that is under consideration, especially if the practice is new or moving into a new area. Of course, this will be less of a consideration in specialties where there is a shortage of providers or strong growth in demand; but even in those situations, strategically locating away from the competition may allow a practice to tap into underserved portions of the market.
#5: Space requirements
Understanding space requirements is fundamental before deciding on how much is actually needed. A space consultant can help you visualize the medical office for you. Adoption of electronic health records (EHR) has caused a change in the space requirements of many practices since it has reduced the need for record storage and filing cabinets. In response to that trend, practices might simply use less space or they might put the same amount of space to better use with more exam rooms or patient consultation spaces.
In addition to how much space is needed, another key concern is what kind of special requirements practices will have regarding the utilization of space. Many will require facilities that can accommodate the disposal of biohazardous waste or the operation of specialized equipment, like lasers or x-ray imaging units. Getting a space ready for those types of operations may very well incur additional costs and there is even the possibility that a landlord may be unwilling or unable to make the needed changes.
#6: Patient accommodations and amenities
An overall trend in healthcare over the past few decades has been the industry becoming more consumer-oriented. In terms of medical office space, this has led (in some cases) to an evolution of clinical environments becoming “softer” with a more spa-like feel. Amenities such as relaxing common spaces, gardens, and cafes within medical facilities have become more common. Such touches may seem unimportant from a pure care perspective, but they can strongly influence the way patients perceive and experience a practice.
#7: Workplace environment
While many of the considerations that go into a medical office space choice are centered on patient needs and practice requirements, it’s important to keep in mind that these offices are workplaces. Providing a productive, safe, appealing, and comfortable environment for the practice’s employees is a key concern. We’ve also discussed current trends in general office space design in a past post. Some of those trends may not fully apply in a medical setting, but healthcare work environments are being transformed by technology and are trending more toward naturalistic environments, along with other sectors of the economy.
#8: Understanding the costs and timelines involved
As a rule, medical office space is more expensive and time consuming to develop than general office space. It is important for potential tenants to be realistic about costs and timelines for improvements and specialized build outs to a space. This is especially the case with spaces that will be used for surgery, x-rays, or those that require specialized plumbing.
As the list of factors above shows, choosing a medical office space for a practice is not a simple process. It can be frustrating or even overwhelming for organizations that are already focused on the demanding work of treating patients. But it is a decision that is important to get right. Beginning the process by firmly understanding the practice’s needs, knowing the right questions to ask, having realistic expectations, and working with potential landlords or leasing agents to find the right match give a practice the best chance of landing in the right spot.
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