WORLD PROPERTY CHANNEL ®

(ENCINO, CA) -- New medical office development in the U.S. in 2010 and beyond may be the industry's savior as President Barack Obama's priority health reform legislation goes to a Senate vote Christmas Eve.

A final version of the bill won't be voted on until mid-January. Many provisions in the bill won't kick in until 2014.

In the meantime, commercial real estate industry pundits are divided on what immediate benefits the landmark legislation will have for developers, investors, tenants and landlords.

Marcus & Millichap Real Estate Investment Services of Encino, CA is bullish on the topic.

The brokerage predicts 10 million square feet of new medical office space will be needed over the next five years.

"Despite the Recession, medical office properties have performed favorably, and demand is set to accelerate as medical reform is phased in over the next several years," the California-based brokerage notes in its newest report.

According to the report, "Health Reform: A Winning Prognosis for Medical Office Investments," medical office vacancy nationally is currently 11.6 percent, up only 100 basis points from a year ago

Traditional office space, by comparison, is 15.2 percent, a 240 basis point increased over the same period.

Marcus & Millichap bases its optimistic outlook on the aging Baby Boomer generation.

"At present, baby boomers account for 29 percent of the total uninsured, yet represent almost one-third of all physician office visits.

"Proposed changes to the healthcare system will dramatically increase demand for medical services among this group. Per person office visits for 45-year-olds to 64-year-olds have expanded by 7 percent over the past decade.

"Insuring 95 percent of this cohort could elevate physician office visits by 12 percent, or 34 million visits, annually.

"At the current average of 120 visits per week for primary care physicians, approximately 5,400 new general practitioners will be needed to handle the additional workload from this age group alone."

The report states that on average, the primary care doctor today works in space totaling an average 1,780 square feet.

"There are still unknowns regarding the methods that will be used to achieve nationwide (medical) coverage," the report acknowledges.  "However, if reform is even partially successful, demand for (more) medical professionals and facilities will increase."

The report estimates about 8,000 new primary care physicians will be needed.

"The addition of even half of these new doctors in the near term would generate demand for another 7 million square feet of medial office space," the report maintains.

"The outlook is even more optimistic when viewed from the perspective of office space required per covered individual," the report notes.

"Increasing the health insurance coverage rate to 95 percent of the population, up from 84 percent at present, would require an additional 21.4 million square feet of medical office space, and based on the current ratio of approximately 0.5 square feet per insured individual."

CJ Follini, a managing principal of Manhattan-based Noyack Medical Partners LLC, notes, "If even half the 46 million people who are currently uninsured, gain coverage under health care reform, the added demand would require nearly 45 million square feet of medical office building space beyond what is needed to satisfy normal demand."

CJ Follini

On the sales front, Follini says that "while deal flow has slowed, like every other building type, medical office building sales, as a share of total office sales activity, have actually risen from 14 percent to 25 percent over the past seven years."

He adds, "Despite recent expansion of capitalization rates, returns have been remarkably stable since the mid 1990s."

Real Capital Analytics of New York City finds medical office space showing the smallest amount of troubled assets - 1 percent or nearly $200 million, compared to $18 billion for the traditional office sector.

In Atlanta, one of the nation's major medical centers, new medical office space development and sales of medical office buildings are down.

CoStar Group puts the amount of new medical office space in Atlanta during the first six months of 2009 at less than 200,000 square feet.  In 2008, the figure was nearly 800,000 square feet.

Still, Kris Miller, president of Atlanta-based Ackerman & Co., remains bullish on the medical office space market.

"The demand for (medical) services tends to be more consistent," Miller tells the Atlanta Journal-Constitution.

The reason, he says, is that "the majority of people who pay for medical services don't pay for it themselves.  Government and private insurance cover it.

"So when you have a Recession, demand for health care doesn't drop as much as say, demand for Rolex watches.  Likewise, when things get good, there are no big spikes."

In San Antonio, TX, rents are rising at most medical office buildings, according to San Antonio-based NAI REOC Partners.

At the end of third quarter 2009, the city's medical office building market recorded an average rent mark of $21.77 per square foot, up 95 cents from the average $20.82 in third quarter 2008.

"The medical market has been the standout performer this year, but even this Recession-resistant segment of the market is subject to Recessionary pressures," says Kim Gatley, senior vice president and director of research at NAI REOC.

Kim Gatley

She notes that over the first nine months of 2009, the medical real estate sector absorbed just over 81,000 square feet, much improved from the 13,737 square feet absorbed over the same 2008 period.

Gatley tells the San Antonio Business Journal the absorption figure for the medical office market "takes into account not only those buildings designed specifically for health care users, but leases signed by medical-related tenants in more traditional office buildings, and even retail centers."

NAI REOC vice president Carl Bohn adds that retail centers "have become a very attractive option, as health care practices become more attuned to convenience issues for the patient."

In New York, a brokerage by the name of Metro Manhattan Office Space, agrees. "Many cooperative and condominium buildings rent or sell their ground floor or basement space to medical practices," the brokerage notes on its web site.

Bohen is confident "the outlook for the medical market (in San Antonio) remains bright and demand remains stable."

Poe Corn

Poe Corn, head of Jones Lang LaSalle's Healthcare and Real Estate Finance group, however, is not as optimistic as some of his colleagues on the medical office building category.

Corn tells the Associated Press "the demand (for new medical office space) is not growing - it's just moving around."

He points to medical office buildings not near hospitals.  The vacancy rate at these properties has risen to between 15 percent and 18 percent, Corn says.

"The bottom line is that when hospitals cut (staff), doctors are not going to continue to expand," Corn argues.

Chris Bodner

Chris Bodner, vice president of CB Richard Ellis's Health Care Capital Markets Group, sees it differently.

"Overall office sales are down this year, but the proportion of deals for medical buildings was up almost 11 percent," according to Bodner.

He tells the AP that vacancies for medical office structures nationally is 10 percent, compared to 16 percent for all other categories of office building.

Probably the most positive note on the medical office building development and investment sector comes from Ernst & Young.

In its year-end analysis, the accounting and consulting firm notes "lenders continue to like health care and have been willing to lend to health care companies."

Ernest & Young "expects this trend to continue.  Health care reform is driving activity in this sector."

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