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  • | 5:54 p.m. September 24, 2009
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Medical-office space, a commercial real estate niche once considered immune from economic shocks, is feeling this downturn and the uncertainty of Obamacare. Medical specialties continue to grow, however.


Jay Crandall recently got a call from the manager of a dermatology office whose lease was expiring.

The office manager asked Crandall, a Bonita Springs commercial real estate broker who specializes in medical-office space, to help her look for both larger and smaller office space.

It was a curious request. After all, a business either is growing or shrinking, not both. But in this case, the practice planned to move into smaller space if Obamacare passed and the larger space if it didn't.

It's not surprising that entrepreneurial doctors are anxious about what socialized medicine will do to their incomes. Expanding a practice requires capital that can't be recouped if government cuts reimbursements.

The uncertain implications of socialized medicine to the health care industry are substantial enough to slow activity, some say. “Right now the ground rules are unclear,” says Jim Allen, managing director of the Healthcare Services
Group of Colliers Arnold in Tampa.

“There is a pent-up demand for that space, but doctors are still hesitant to push forward,” says Mark Stevens, president of Stevens Construction, a Fort Myers-based construction company that specializes in building medical space.

The slowing economy has reduced patient visits, particularly to doctors who perform elective surgeries such as cosmetic dentists and plastic surgeons. The joke circulating among commercial real estate brokers who specialize in medical space: “Boobs and noses are going to look the same next year.”

Besides lower patient volume, declines in insurance reimbursements are also forcing doctors to consolidate into larger practices so they can pool their resources together and lower their overhead costs. “Doctors grow their practice by adding another doctor,” says Barry Edwards, president of Barry Edwards & Associates in Sarasota.

That all has translated into more empty medical-office space. According to CoStar data provided by Cushman & Wakefield, the vacancy rate for medical-office space in the Tampa Bay area rose from 6.6% in the second quarter of 2007 to 9.5% in the second quarter of 2009. In the Southwest Florida region that includes Charlotte, Collier and Lee counties, the vacancy rate rose from 9.2% to 13.3% in that same period.

But Allen says some of the empty space is obsolete. Space built in the last 20 years was designed for small two- to three-doctor practices. Because of the trend to larger practices, doctors need larger spaces with more parking.

The need for newer space continues to drive construction. For example, Stevens is working with a group of orthopedic surgeons that is consolidating scattered operations into a single center.

For some, rents and construction costs have declined to the point that it's now worth the risk of expanding despite the political and economic uncertainties. “They understand that the market is very favorable for tenants and buyers,” says Thomas Dyer, vice president of marketing and leasing for Starling Realty in Sarasota. The firm has been leasing and building medical space for 30 years.

As with any real estate decision, the key is location. “We've been very particular about where we put our buildings,” says Dyer. Buildings have to be close enough to major medical centers such as hospitals. “We've got buildings where doctors want to be.”

The further a medical-office building is from a hospital, the lower the rents and the higher the vacancies, says Edwards. “The on-campus buildings are always going to do fine,” he says.

Despite better deals, leasing has become a much more arduous process as doctors take more time to weigh the costs. “Negotiations that used to take two weeks are now taking months,” Crandall says.

Perhaps the biggest stumbling block continues to be the lack of financing. Bankers stung by bad residential and commercial loans have blacklisted much of Florida, even for successful physicians.

Obama fear factor

For some doctors, Congress' overhaul of the health care system is the biggest concern. That's especially true for those practices that rely on Medicare reimbursement, the federal health-insurance program for the elderly.

Others are less concerned. For example, medical specialists in narrow fields are less likely to be impacted because they can command higher insurance reimbursement rates. Specialists who treat rare cancers or obstetricians who specialize in high-risk pregnancies may feel less of an impact than more-numerous primary care physicians, says Crandall. “As far as the Obama plan, they feel it's far enough off in the distance,” he says.

Some brokers say the health care overhaul discussions haven't stopped doctors at all. “Nobody's mentioned that as a stumbling block or as a factor as to when they'll make a decision,” says Dyer.

But no one likes the uncertainty.

“The worst thing that could happen is there's no legislation,” says Allen, who says the health care debate would then drag out into next year. “Then, we won't have a clear set of ground rules.”

The new economy
Over the last decade, entrepreneurial doctors have siphoned off patients that used to go to the hospital by building their own surgery centers. Although that trend may slow because of the economic downturn, it's going to continue because of advances in technology.

Medical advances in technology will allow patients to return home after a procedure rather than spend a night or two at the hospital as they do now. “Right now, 60% of the procedures are inpatient and 40% are outpatient,” says Allen. “In the next five to 10 years, that will reverse.”

To keep up with technology, construction companies will continue to retrofit older buildings and build new ones. Many builders are focusing on more highly specialized medical facilities that may not be as affected by future legislation or a sluggish economy. Two areas seeing increased activity include psychiatric and rehabilitation facilities where reimbursements are higher.

Some areas of the state appear to be more active than others. For example, Stevens Construction has opened an office Orlando, which isn't as depressed as Southwest Florida.

But Stevens is also building medical facilities in areas of Southwest Florida that lack certain specialties. For example, Stevens recently built space for a chiropractor and an eye surgeon in Cape Coral, despite the fact that the city is one of the hardest-hit areas of the Gulf Coast.

 

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