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The Growth of Medical Office Condos
Office condo project, Ironwood Square, contains three phases totaling 265,000 square feet located opposite Scottsdale Healthcare in Arizona. |
Residential real estate may have significantly declined in recent months in many markets but construction of medical office condos has kept up at a measured pace, according to Neal Waldman, senior vice president of Scottsdale, Arizona-based SAXA (formerly Shea Commercial).
“While home values are depreciating in many areas, medical condos are holding their own and, in most cases, are continuing to appreciate,” he said. “Medical office condos are being constructed in most major markets nationwide. Experienced developers are sticking to basics and office space in prime locations is still in high demand. These locations tend to sell quickly because an increasing number of physicians and medical groups prefer to buy their own office for their practice and reap the financial benefits of ownership.”
There are many reasons for the strong office condo market, according to Waldman. High rent prices and dramatic increases in property costs in recent years have prompted physicians to consider the investment potential of office condos, which offer them the opportunity to earn equity, manage their own space and share construction costs. Increasingly, healthcare professionals are discovering they can own their office space for the same or less monthly payment than they spend on rent. Best of all, buying a condo can be a lot less expensive than constructing or buying a building and does not require an enormous upfront cash outlay.
The Marketplace
What are some of the trends in medical condos? According to the SAXA executive, location naturally is of prime importance in building or purchasing an office condo. Newer medical office complexes are being clustered around the fringe of hospital campuses. For example, Ironwood Square is a 265,000-square-foot development on 45 acres across the street from Scottsdale North Memorial Hospital in Scottsdale. There are multiple similar projects being built in other markets with large concentrations in South Florida, Dallas, Denver, Southern California and Nevada, among others.
In a majority of office condo complexes, approximately 60 percent of the space is utilized for medical offices. This provides a built-in referral network for all practitioners in the development. Many buyers have well-established practices who want to own their office space and benefit from some extra cash flow. For example, a typical medical building is 6,500 square feet, but the practice takes up only half of that space and leases the remaining space. If the physicians want to expand the practice, they can move into the extra space after their tenant’s lease expires. In the meantime, they lease out the excess space and defray the cost of occupancy.
Key Market Trends
- Medical surgical centers of approximately 10,000 square feet are gaining in popularity. They can be located offsite, but in close proximity to a hospital in case of emergency.
- More and more hospitals are getting involved in joint ventures with third-party developers for on-campus medical office buildings.
- Some developers are considering three-story plus condo projects (as opposed to the traditional one or two stories), although many physicians feel they will lose their unique identity and convenience in a multi-story complex.
For more information
SAXA:
www.saxainc.com
Solar Applications Highly Practical for Commercial Buildings
Electrical power derived from solar installations is becoming increasingly viable in commercial buildings as two recent examples show.
Seventh Street Development, for example, recently showed solar electrical alternatives to buyers of industrial buildings at its Waterman Business Center in San Bernardino, California. According to principal Craig Furniss, Waterman is a 191,000-square-foot commercial center that features 10 new, free-standing industrial buildings ranging in size from 9,543 to 29,057 square feet and two business condominium buildings offering office and industrial units between 2,068 and 10,464 square feet.
Waterman is working with Irvine, California-based Suntrek to offer buyers five different solar system options sized from 3,300 watts to 19,800 watts, which will be customized to the energy needs of each user. The various packages include the installation of the solar panels, the inverter to convert solar power to AC power, and a computerized controller that regulates the system and directs unused power back to the utility.
“Buyers will receive an immediate return on their energy investment,” explained Furniss. “Seventy to 80 percent of the cost of the system is being subsidized with rebates and tax savings through accelerated depreciation, with the remainder being paid off by energy savings.” Furniss added that if buyers finance a properly sized solar system, they can see positive cash flow the first year.
‘Solar as a Service’
Recurrent Energy, a firm headquartered in San Francisco, offers a much different approach. Arno Harris, president of the company, has a program called “Solar as a Service,” which he said overcomes barriers that historically have prevented property owners from deploying solar power on a widespread basis. It delivers all of the benefits of onsite solar generation-guaranteed electricity pricing, carbon emissions reduction and green marketing appeal without upfront costs or operation risks, according to the president.
“In creating ‘Solar as a Service,’ our goal is to transform the solar industry from selling a large solar system to a building owner to really selling solar-generated electricity at competitive rates and making it much more of a no-brainer for the owner and tenant.”
Harris said that the key to opening up that market is really packaging solar in a way that is attractive for the owners of those buildings and overcoming some of the barriers that have traditionally kept solar from being widely adopted by institutional property owners. “There is a great perception out there that the issue is cost,” he stated. “The reality is that in markets like California, New Jersey, Maryland and other places, with the incentives that are in place, cost is not the issue. Solar power can be offered at a competitive price.”
How does Recurrent Energy do it? It builds, owns and operates the system on the commercial building roof and then sells the electricity to the tenant and owner. “We basically can offer electricity that is guaranteed at a reasonable rate. How do we make sure that everyone benefits? The owner gets the electricity at a competitive rate and we become the top-floor tenant in the building,” he said. “We are leasing the rooftop space and paying the owner roof rent. What is great about this for the owner is that they are making incremental income from the building without making any capital improvement to the building.”
For more information
Seventh Street Development:
www.7thstreetdevelopment.com
Recurrent Energy:
www.recurrentenergy.com
New Land Lease Book
Ground leasing can be just as profitable to a developer as purchasing land, sometimes more so, and landowners can also sometimes do better by leasing than by selling, according to Ground Leases and Land Acquisition Contracts, a contracts guide published by Research and Markets Ltd.
Ground Leases and Land Acquisition Contracts analyzes ground lease clauses in depth. Readers learn how to choose between a subordinated lease, an unsubordinated lease and a land acquisition contract. They also learn how to negotiate lease and contract provisions that suit their needs, how to deal with the underlying business problems raised by all parties, and how to structure and draft these vital agreements from scratch. Annotated sample forms explain the origins of each provision and the reasoning behind it.
The guide also includes essential coverage of the hidden risks of restrictive use clauses, rent increase provisions, clauses preventing assignability, and other language that can materially impair a project’s market value and even result in disastrous losses.
According to Research and Markets, all too often, developers, lenders and investors learn the hard way that overlooking a single, seemingly innocuous, clause can end up wasting massive amounts of money in construction costs, development expenses, principal and interest.
For more information
Research and Markets:
www.researchandmarkets.com
Redevelop Functionally Obsolete Space for Potential New Profits
According to the latest statistics from CB Richard Ellis, national tenants are paying top dollar for new industrial space with about 120 million square feet of industrial space constructed for 2007 and 37.5 million in the last quarter alone. But with high land prices and scarcity in some markets, developers are finding a ready market for redeveloped older space, according to the CCIM Institute’s recent Commercial Investment Real Estate report. According to the report, properties with solid structures in accessible locations can be updated and marketed to a variety of users. These spaces can be marketed to tenants who understand the economic value of repositioned space compared to new space.
For more information
CB Richard Ellis:
www.CBRE.com
CCIM Institute:
www.ciremagazine.com
By Ron Derven, contributing editor, Development magazine
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