Demand for Medical Properties Brings Investment Opportunities

The real estate market is in a funk. Sales of residential homes have dropped, and even the demand for commercial real estate has slowed. But, in sharp contrast to those trends, the demand for medical properties is increasing and, according to a report by Grubb & Ellis Company, a real estate services and investment firm, are positioned to outperform other property types over the next 10 years.

The real estate market is in a funk. Sales of residential homes have dropped, and even the demand for commercial real estate has slowed. But, in sharp contrast to those trends, the demand for medical properties is increasing and, according to a report by Grubb & Ellis Company, a real estate services and investment firm, are positioned to outperform other property types over the next 10 years.

“We’re seeing the same thing,” says Donna Jarmusz, senior vice president for Alter+Care, the nation’s sixth largest healthcare real estate developer. “Despite the way the economy is, [medical property] is still going strong.”

Even in Detroit, which Doug Smith, vice president for Michigan-based Acquest Realty Advisors, a real estate investment advisory and asset management firm, says is leading the economic downturn, the medical real estate market is strong. “If it weren’t for medical, there probably would be no [building] activity here in Detroit.”

Baby-boomer driven

The Grubb & Ellis report lists several factors that are fueling the demand for healthcare properties, and chief among them is the baby boomer influence. For example, the report notes that individuals age 65 to 74 made an average of 6.5 visits per capita to physician offices in 2005 compared with 3.3 visits for all age groups. That 65-and-older age group is also expected to grow 36 percent between 2010 and 2020.

“Americans are living longer than ever before,” says Mark Alexander of Sperry Van Ness, commercial real estate advisors. “The older you get, the more medical care you need, and the more doctor visits you’re going to have. Even in states where the population is not increasing, you still have growth in the medical field because of the population aging. So, the prognosis for medical office properties is terrific.”

And not just any medical property. According to the American Hospital Association, the number of hospital beds in the U.S. declined by approximately 20 percent from 1982 to 2004, an indication—say Grubb & Ellis—that consumers are increasingly accessing healthcare services in outpatient settings such as medical office buildings and freestanding clinics.

One-stop shopping

Jarmusz explains that the days of pension plans and healthcare benefits being paid for by former employers are gone. Retirees will have to rely on Medicare and money from their own pockets when obtaining healthcare services. As such, they’re going to want convenience and accessibility.

“Just as the banking industry has provided drive-thru banking, the healthcare industry has to start looking at how it’s delivering its services,” she says. “That’s why the medical office building is now evolving into a one-stop shopping healthcare destination, as opposed to having just physicians in a building.”

Charles Bendit is banking on that. The co-founder of Taconic Investment Partners is two-thirds of the way through development of a medical condo on Manhattan’s upper East Side in New York City. “What’s needed is a place where you can create a healthcare community. We’ve had one group that wanted to purchase the building as a place for senior citizens to go for medical treatment, for social interaction and other programs. As baby boomers continue to age, there’s going to be a need for these types of facilities.”

Smith pointed to a trend that is affiliating hotels with hospitals and health systems, specifically to address the needs of individuals who need to have access to care but do not require a hospital bed. “If you just had surgery, rather than spending four or five days in a hospital, if you were able to move into a connected hotel facility from which you could easily get over to the hospital for follow-up care, it’s an excellent tool to manage the care process.” As well as control escalating healthcare costs.

Sound investing strategy

Experts agree that medical properties are a sound investment strategy. But as with any investment strategy, there are differing opinions as to the best approach to take. Jarmusz, for example, favors investing in healthcare services facilities as opposed to owning your own office space, particularly for certain medical specialties.

“If you’re an orthopedic surgeon and you own 2,000-square feet in a building, and the condo next door’s 2,000-square feet is owned by an OB/GYN group, and you want to expand your practice, guess what?” she askes, rhetorically. “You can’t go anywhere because your next door neighbor owns that space. I think physicians will make a better long-term investment by investing in healthcare services.”

Bendit, on the other hand, says that a medical practice is an asset with value that can always be sold along with the office space. “The actual practice has tangible value. It’s an asset; a place where a doctor can practice that is already set up. And by owning, you’re not facing a lease expiration, or having to sell a practice subject to a lease. Doctors control their own destiny.”

Ed Rabinowitz is a veteran healthcare reporter and writer. He welcomes comments at edwardr@ptd.net.