Healthcare industry trends are not only changing how doctors do their work, they're also influencing the types of buildings where they do it.
Group practices' growth and closer interaction with hospitals, along with the march of technology, are prompting some doctors to board up their older, stand-alone medical office buildings and take up residence in larger, often hospital-attached facilities.
"Historically, physicians have been in smaller buildings and storefront, retail-type facilities. They are moving into on-campus hospital buildings or larger outpatient facilities, where there are other physicians and ancillary services," says Malcolm Sina, executive vice president of West Palm Beach, Fla.-based Dasco Cos., a wholly owned subsidiary of PhyMatrix Corp. and the nation's largest medical real estate development firm.
When selecting medical office buildings, doctors face various hurdles. Larger groups typically use less space per physician but more space overall, creating demand for much bigger suites. In addition, physician practices are becoming more integrated with hospitals, which, as a result, are adding on medical office buildings that house both employed and private-practice doctors. And advanced technology and ancillary opportunities are creating a need for fiber-optic wiring and separate rooms for technical procedures.
Unlike older medical office buildings, newer facilities are designed to address these criteria.
"The equipment is becoming more sophisticated, and the procedure rooms have to be modified for the new equipment," Sina explains. "Therefore, the medical office facilities being developed are more sophisticated and complex than they ever have been."
All this comes at a price, however. Physicians typically pay higher rent in new medical office buildings, says J. Barry McGee, a commercial real estate agent with Latter & Blum, Baton Rouge, La. "In all new construction, rents are higher than they are in existing buildings," he says. The investment required for new amenities, additional parking and state-of-the-art facilities results in higher rent.
The need for more space was the paramount concern for Lynn Hughes, M.D., an ear, nose and throat specialist in Concord, N.C. Hughes moved from a stand-alone building last summer to a new medical office building attached to NorthEast Medical Center, also in Concord.
Hughes' private practice outgrew the 3,500 square feet of space it had occupied in a medical office building he had owned and remodeled four times. After more than 20 years in the building, Hughes and his 17 employees moved two blocks down the street to the new location. The practice, renamed NorthEast Ear Nose and Throat Center, now occupies 5,500 square feet.
In addition to a reception area, examination rooms and offices, the space includes a head/neck surgery room, an allergy section and an audiology section, where Hughes and his new physician associate dispense hearing aids and conduct audiological and balance testing.
Hughes' decision to move his practice was prompted primarily by his urgent need for a larger medical facility and more parking, but a related issue was the arrival of managed care. "Managed care is just now hitting our community," he says. "That's decreased incomes, so it's really necessary to enhance your (practice's) growth potential if you are going to continue to make a good living. There was no way we could expand where we were."
Hughes' project was funded through an off-balance-sheet financing arrangement.
In such deals, a physician practice teams up with a hospital to construct a new on-campus facility and a developer to arrange the financing.
"We form a third-party entity, a limited liability company, that carries the mortgage in its name and on its balance sheet, so the hospital doesn't have the debt as a liability on its balance sheet," explains Anita Doran, vice president of marketing for Matthews, N.C.-based Cogdell Group, the third-largest healthcare developer in the country.
This method of financing is attractive to physicians and hospitals that want a new medical office building and an ownership interest but don't want to borrow large sums of money. "They don't want to come up with any of the equity," Sina says. "They don't want to sign the mortgage liability. They don't have time to put into the project. And they don't want to take the risk of cost overruns."
Bennie Nobles, M.D., an obstetrician in Metairie, La., was involved in another off-balance-sheet-financed deal.
A year ago, Nobles, his two associates and his staff moved to a new hospital-attached medical office building. They had contemplated the move a year earlier, when Nobles sold his practice to East Jefferson Physician Network, a multispecialty organization with approximately 35 physicians that is owned by East Jefferson General Hospital in Metairie. The building is owned jointly by a limited partnership of the hospital, some of the physicians and the developer, Atlanta-based Carter Oncor International.
Nobles says he was comfortable in his prior building, of which he was a part-owner, but his new location is more spacious and modern. And having the delivery unit just 50 feet from the offices saves time, which is beneficial to both the physicians and pregnant patients.
In Hughes' case, the new building houses three internal medicine groups; two general surgical groups; three ear, nose and throat groups; a cardiac surgical group; a neurosurgical group; a psychiatric group; a fertility center; and various other practices. Also housed there are a number of physicians employed by the hospital. Hughes is a part-owner of the new facility.
The benefits of various specialty groups being under one roof are numerous, developers say. An on-campus location offers patients the convenience of one-stop shopping for medical services, increasing doctor-to-doctor referrals.
Certain types of practices are less likely to be located in a large hospital-connected or multispecialty building, developers say. For example, pediatricians often are less welcome because other tenants complain about noisy children roaming the hallways. And cosmetic surgeons prefer off-campus locations to protect patients' privacy.
The migration of physicians to larger quarters raises the question of what happens to the older buildings they leave behind, which depends on the location and condition of the building. Some older buildings stand partially vacant and linger on the market; others are acquired quickly and remodeled for new uses.
Richard Juge, broker/owner of Re/Max Commercial Brokers in Metairie, says investors can purchase an older medical office building in a good location with a lower price per square foot than that of a comparable nonmedical office building.
However, medical office buildings often aren't attractive purchases for commercial business owners. "The problem is that when the doctors built the building for themselves, they built 6-by-8 rooms, and those aren't of any use to (other businesses. The new owner) has to spend a significant amount of money to rehab or redevelop the building for something other than medical office use," Juge says. Such a conversion might be less expensive for a home-care facility or optical center.
Doran says she sees an oversupply of older medical office buildings in some areas. "When new physicians come into town, they don't want to buy somebody else's old building," she says. "It's very difficult for physicians who have a stand-alone 6,000-square-foot building to unload those buildings. Nobody wants them."
Nobles' experience is illustrative. He says his previous medical office building was on the market for about a year before it was purchased by investors. The 10-year-old building was in good condition but was located on a side street, not a main thoroughfare.
However, Hughes' experience was quite the opposite. When he moved to his new location, the hospital purchased his former building. It turned out to be a wise acquisition for the hospital.
"That's one of those decisions that if you use hindsight, you wouldn't have made it," he says. "I sold the building to the hospital because it was contiguous with their property. After I moved, one of the doctors (suggested using it for urgent care). The hospital was going to raze the building for a parking lot, but it's doing so well as quick care that they've elected to keep it. I could be leasing it to the hospital. It would have been a good investment."
Location is a key factor in determining the fate of an older medical office building, but the state of the local commercial property market is important as well. Nationally, commercial property has made a strong comeback this year, after a prolonged period of malaise.
While a medical office building might fetch a lower price than a comparable nonmedical property, commercial properties overall are appreciating in value -- a positive trend for doctors thinking about selling an older building and moving to a new, larger medical office.
Marcie Geffner is a Los Angeles-based freelance writer.