Office Sector Accommodates Expanding Healthcare Industry

Cushman & Wakefield Professionals Discuss Trending and Impact on N.J. Market. End Quote

Bergen-Passaic, NJ (1888PressRelease) June 17, 2014 - The rollout of the Affordable Care Act this year placed healthcare as a top focus for all Americans - and for the commercial real estate community as well. With an increased emphasis on preventative care, and more people carrying insurance in general, demand for health services is on the rise. Hospital and large specialty groups are working to increase their reach in an expanding marketplace. These, in turn, are creating momentum for medical-appropriate commercial space.

The result for commercial real estate services providers? An uptick in demand for consultative services for healthcare organizations and the property owners looking to accommodate them. In the following interview, Cushman & Wakefield's Jeffrey Prezant, a director and office brokerage specialist, and Eileen Carey, managing director of Corporate Occupier and Investor Services, offer their ground-level perspectives on how the New Jersey marketplace is responding. Based in the firm's East Rutherford office, both are actively involved with this blossoming niche.

What are some of the trends you are seeing among healthcare companies in the office sector?

Carey: Hospital systems, in particular, are becoming more active users of office space. They are looking to grow market share and are embracing the consumerism of care. In other words, they are becoming more patient focused, and they are working to balance the delivery of their services in locations that are convenient for their clients. Additionally, all hospitals today are pushing for ambulatory care vs. in-bed care. They are establishing one-stop locations where patients can go for simple procedures, physical therapy, imaging and other services. In many cases, they are targeting office properties - which may or may not also include traditional office tenants.

Can you provide an example?

Carey: A local hospital in Bergen County, New Jersey, is expanding rapidly. The organization recently purchased a three-story 110,000-square-foot office property that currently houses a number of non-medical tenants. The hospital's eventual goal is to occupy to the building with medical practice groups associated with the hospital. They retained Cushman & Wakefield's property management group to assist with the property management of the existing tenants throughout the transition. Setting up a management program that will accommodate the building's "hybrid" use until the current leases roll and the transition to pure medical office is complete also requires project management expertise, as tenants may have to be relocated to other areas during this evolution.

Are most of these larger healthcare space users buying properties, or are they leasing as well?

Prezant: Property acquisitions are more common when the asset can serve as an extension of a main hospital campus. For true satellite locations - strategically positioned to extend market reach and/or bring services closer to customers - hospitals typically rent space. Orthopedic, urology, cardiology, internal medicine and pediatric groups with a hospital's branding are springing up at properties far beyond the organization's main campus. Independent, multi-office medical practices are doing the same thing. You will see a large orthopedic or imaging group, for example, with a dozen leased locations across several counties.

How are office landlords creating supply to meet this demand?

Prezant: Smart office owners with Class B and B+ properties in need of stabilization are looking closely at the benefits of accommodating healthcare-related tenants - whether large hospitals or specialty groups, or independent practitioners. As a general rule, medical tenants will lease space in buildings with traditional office tenants, and they typically are drawn to properties with smaller floor plates and plenty of windows for natural light. On the other hand, traditional office tenants are less apt to lease space at properties where medical is dominant. At some point, the balance tips, and a property originally developed for office use becomes "medical office." We are seeing this happen with increasing frequency. In Northern New Jersey, which continues to struggle with high office vacancies, the entire market is benefiting.

Can you cite a case study?

Prezant: We are the marketing agent for a 33,000-square-foot, multi-tenant building in Montville, New Jersey. The property sits on five acres and has expansion potential. For the past several years, medical practices (including an imaging center, dentist, physical therapist and oncologist) comprised about half of the tenant base, with the balance leased to an office tenant. That office user recently left, and the ownership is now leasing purely to healthcare firms. In a market with an office vacancy rate of more than 30 percent, this is a great move. Additionally, the property is located proximate to three Morris County hospitals - Morristown Medical Center, Chilton Medical Center in Pompton Plains and Saint Clare's Health System in Denville, which provides competitive advantage. From a leasing perspective, the availability is drawing significant interest from a range of users, including hospitals. We also are seeing tremendous activity on the acquisition side, from both developers and users.

How has this paradigm shift impacted real estate services providers?

Carey: Healthcare organizations are experts in the medical business and do not have the resources of a commercial real estate firm to manage multi-tenanted properties. They look to companies like Cushman & Wakefield to advise them and help facilitate their growth strategy. Cushman & Wakefield helps them assess their real estate holdings to ensure that they are managed in a cost-effective manner and that we are maximizing their value. They also may want a real estate services provider to manage their assets and effectuate the transition to medical office.

Prezant: For landlords, experienced service providers can help position properties to serve the healthcare community. Leasing professionals who understand the sophisticated needs of this tenant group are best suited to match spaces with appropriate users. And knowledgeable property managers can be great resources when it comes to helping owners ensure appropriate parking ratios, directional signage, ADA access, cleaning and security for increased public traffic. Those who are well versed in JCAHO standards, and life safety, OSHA and other regulatory compliance requirements for medical space can be invaluable partners in the tenant fit-out process as well.

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