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Prescription for Growth: Tech-Savvy Medical Office Buildings
[ By Sharon Harper ]
For those seeking a long-term investment, vacancy rates are hovering around five to 10 percent for stabilized MOBs, with tenants generally married to a certain location for the foreseeable future. For developers and builders, opportunity exists as hospitals increasingly leave development, leasing and management of on-campus MOBs to trusted third parties. Moreover, advancing technology, which makes delivery of complicated services possible, and even desirable, outside a hospital setting, creates demand for suburban MOB space. Thoughtfully conceived master plans for new communities anticipate resident needs and incorporate medical services, presenting yet another avenue for the full range of MOB and hospital development. The only caveat on the market side is that players must be careful not to overbuild and thus muddy the fundamentals. In 1977, the co-founder of The Plaza Companies, Harold Gries, M.D., was a practicing physician who wanted to own and build equity in the building in which he practiced. At the time, the hospital and surrounding property owners would not sell land for such a development. Dr. Gries found a site within a mile of his existing practice and built what resulted in The Plaza Companies' first MOB, a 30,000-square-foot property in Peoria, Arizona. The property houses a full modality imaging center, internal medicine, pulmonary, podiatry, family practice and dentistry and is currently 100 percent leased. That first building is now surrounded by Plaza del Rio, a 165-acre medical and senior living master-planned campus totaling more than one million square feet. This growth occurred as the company learned that medical practices perform better when clustered. Because physicians refer patients for various procedures and to specialists and other medical services, having these services conveniently located builds business for all providers and provides patients a major convenience. Today, MOBs make up approximately one-third of The Plaza Companies' three million-square-foot portfolio. The company portfolio includes properties in nearly a dozen Arizona locations. Major projects include the mixed-use Arizona State University (ASU) Scottsdale Innovation Center called SkySong, the 185-acre mixed-use Plaza del Rio campus, a number of hospital campus medical office projects and several residential senior living accommodations, including Classic Residence by Hyatt and The Plaza Companies, Splendido at Rancho Vistoso and Silverstone at Pinnacle Peak.
The Plaza Companies recruits people who understand the complexities associated with this very specialized business. An understanding and appreciation of how a medical office is organized, recognition of the demands and constraints of physicians, the high cost and special requirements of tenant build out, for example, are critical.
This five-story, 150,000-square-foot property has the latest technological conveniences, including high-speed Internet access, touch-screen directories, electronic medical record capabilities and a community conference center. To provide extra benefits to all users, there is also a caf‚, pharmacy and optical shop. The comfortable feel of the building is enhanced through the collaborative effort of several artists, who selected the more than 100 artworks on display to reflect Arizona culture. This building is part of a planned regional medical center strategically positioned to serve the rapidly growing western suburbs of Greater Phoenix. Exteriors are designed to capture maximum attention from commuters along the adjacent freeway. When completed, the buildings built and managed outside the hospital's direct control will house medical and surgical specialties, imaging and laboratory services, as well as a freestanding ambulatory surgery center. The hospital itself will eventually expand to 600 beds. The Plaza Companies works closely with Banner Estrella to ensure that any challenges are discussed and issues resolved. There are challenges to completing all transactions, whether physicians choose an ownership position or a traditional lease. Physicians would rather practice medicine than spend time in lease or tenant-improvement discussions. This often affects time frames and possibly lease start dates. Hospitals usually demand approval of tenants and often provide exclusivities for certain groups or specialties, which affects lease-up. Also, hospitals typically require ground leases, which can make financing more difficult and equity investment more cautious.
A Sophisticated Surburban MOB Today, this 70,000-square-foot, Class A facility is open and 90 percent leased. Four of the 20 physician tenants opted to take ownership positions in the property. The Princess facility takes full advantage of shifts in technology, which allow more ambulatory services to flourish. This increased focus on specialized and acute care opens up opportunities to a wide range of national tenants. In addition to the tenants housed at Princess, there is ample opportunity for dialysis clinics, imaging centers, physiotherapy services and urgent care centers to set up shop in suburban MOBs. The project was designed to anticipate the rapid technological advances that occur daily in the healthcare field. The biggest challenge with this project centered on pre-leasing requirements and expectations. Because of the Class A design, materials, expenses and rental rates were at the top end of the market. Until physician tenants could see the quality of the construction, which showed the caliber of the project, they were reluctant to commit to the space. Once Phase I was fully under way, leasing was strong and the second phase proceeded rapidly. While there is always the danger of overbuilding, for the foreseeable future MOBs should outperform most other real estate categories. The Plaza Companies will continue to explore new avenues for MOB development in Greater Phoenix and may also reach outside of Arizona to where growth is spurring demand for convenient and high-quality healthcare facilities. This will require a continued company-wide understanding of technological, economic and lifestyle advances and trends. MOBs also require significant attention to the latest in design standards. Strong, contemporary and evocative design must incorporate both current and anticipated technology and growth plans. And most importantly, the building's design must be responsive and express concern for patients. It is critical for these buildings to work for a range of patient needs, medical and surgical specialists and their ancillary services. They must also be sensitive to external market forces, including changes in healthcare plans, Medicare and Medicaid. Sharon Harper is President and CEO of The Plaza Companies, based in Peoria, Arizona.
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