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Greenville Business Magazine

Patients, Property & Profits

Jan 02, 2018 01:05PM ● By Emily Stevenson
By John Jeter

Stop us if you’ve heard this one. An orthopedic surgeon walks into a developer’s office, wanting to build a standalone clinic for her practice. The developer asks about her specific needs. She says: “Dislocation, location, dislocation.” Investors are smiling, too, with the health care sector’s increasing need for L-cubed real estate.

“I think it means opportunities,” says Robert Martin, a partner in Carolina Holdings, a downtown Greenville development, brokerage, and property-management company. “Drive all over Greenville and Spartanburg and you’ll see developers are putting projects together.”

Just two examples:

The $31.5 million, 78,000-plus-square-foot Clemson University Center for Nursing, Health Innovation and Research. GHS owns the Grove Road site and will enter into a fair-market-value building lease with Hughes Development Corp., a 2017 Clemson media release says.

The $3.2 million, 18,000-square-foot Children’s Medical Center in PointCentral at Verdae, the initial phase of a 7.35-acre development from KDS Commercial Properties. Occupancy is expected in early 2018.

“Since the Affordable Care Act in the past five years or so, hospitals have had to revamp their delivery models,” says KDS principal Larry Webb. “You’re starting to see hospital systems acquire more and more medical practices in the marketplace.”

That is, location, location, location, with ever more off-campus facilities offering consumer-retail convenience—and, coincidentally, increasing economies-of-scale for hyper-competitive, and expansively aggressive, health care providers.

“Interestingly enough, the same real estate disciplines and tools found in the corporate sector are heavily utilized in the delivery of real estate in the health care world,” Mark Curtis and Jon Papps, directors of facilities development for GHS, wrote in an email.

That world is growing. Revista, a national medical real estate data platform, says in a May 2017 report that total square footage of Medical Office Buildings grew nationwide from 17.7 million in 2016 to 22.6 million in 2017—double the amount from 2014.

A development-risk nightmare? Consider this: Nationwide, occupancy rates exceed 92 percent, with net operating income exceeding $20 per square foot from investor-owned outpatient buildings, the Revista report says. According to Colliers International in 2017, MOBs’ net absorption rates nationally increased 25 percent from 2015 to 2016, the highest annual total since 2008.

“The health care real estate sector is increasingly attractive to developers and investors for the greater stability in rent income stream, tenant retention, and overall stability of the medical office building assets,” says Mary Beth Kuzmanovich, national director of health care services at Colliers.

Despite the ACA’s wobbly politics, higher construction and development costs, and changing “site-neutral payment rules”—the way Medicare pays off-campus facilities—Colliers forecasts a 6 percent rise in per-capita health care spending through 2025.

“The current climate of uncertainty does not appear to have significantly altered strategic planning on the part of health systems, as market participants indicate that real estate projects in planning phases continue to move forward,” Becker’s Hospital Review, a national trade publication, reported 2017.

That’s reflected in the rates of private investment: from equity investors to Real Estate Investment Trusts. Nationwide, private equity in medical real estate reached nearly 34 percent in 2016, with REITs accounting for 48 percent of the total transaction volume and hospitals/hospital systems comprising the rest, Revista says. (GHS’s treasurer, Larry Gosnell, says the system owns 69 percent of its square footage.)

“Medical office was always a sector of the real estate world, but a small sector,” Martin says, adding that while Carolina Holdings primarily handles retail, “We’re catering to an increase in the amount of medical real estate that, 10 years ago, we weren’t. It’s a little bit of a sea change.”

While retail is more speculative than medical, Webb says, “The issue with health care development is that it’s intense. It takes a long time to pull a deal together—more strategic issues that you have to put together.”

A typical office deal takes 12 to 18 months from concept to reality, he says, while a medical deal can take five years. “Not all of them,” he adds, “but they can take that long because a lot of thought and processes are behind it. You don’t have quite as many developers in the health care arena because it’s a lot more time-consuming.”

That’s largely because of facilities’ granular, and costly, design requirements—not to mention health care’s singular mission: to serve sick people, rather than attracting customers with red-tag sales.

As GHS’s Curtis and Papps’s email says: “One difference between GHS and a traditional retailer is that we measure our return on investment in community care and not in creating the highest profit.”