The Changing Geography of Health Care Real Estate

Spring 2019 Issue
By: Camille Galdes
Cowork Medical is envisioned as a network of coworking spaces for doctors. The first location is in this medical office building in Chevy Chase, Maryland, just outside of Washington, D.C.

As demand for health care grows, medical tenants are entering new CRE markets and beginning to use older properties in innovative ways.

In the U.S., an aging population is increasing the demand for health care services and putting medical office space in the spotlight. However, today’s consumers are not looking for a typical doctor visit; they want accessible, efficient and technologically savvy medical services. To meet the needs as well as the preferences of their patients, health care providers are moving into new types of spaces and using traditional commercial real estate in new ways.

Traditional Medical Office

The health care industry has been growing steadily, even throughout the Great Recession. Medical office space, the commercial real estate property type traditionally occupied by health care services, refers to multilevel office buildings with only medical tenants. According to CoStar, which tracks more than 900 million square feet of medical office space in the 54 largest U.S. metropolitan areas, this segment has been adding new supply twice as fast as overall office space since 2000. While total office inventory grew by 20 percent, medical office grew by 40 percent, and vacancy rates stand around 100 basis points below that of total office (8.7 percent compared to 9.8 percent).

Paul Leonard, managing consultant for CoStar Portfolio Strategy, calls the resiliency of demand for medical office “remarkable.”

“Since the turn of the century, we’ve seen nothing but growth,” he says. “Net absorption has not had a negative year for around two decades; it has slowed but never gone negative.”

Demographic Forces

A central driver behind growth in health care has been the aging of America’s historically large Baby Boomer generation. Born between 1946 and 1964, the Baby Boomers have been entering the 65-and-older population since 2011, an age cohort that tends to have increased medical needs. Over the past decade, this age group increased from 12.8 percent of the population to 16.1 percent. By 2030, more than a fifth of the population is expected to be over 65 years of age.

According to data from the 2010 Census, after age 64, more than two-thirds of people (66.5 percent) start frequenting the doctor three or more times a year, up from less than half of those aged 46-64 (44.2 percent). Furthermore, longevity has been steadily increasing for a century now, and a debate rages about how much people will be able to extend their lives through advances in science and technology. If futuristic anti-aging efforts are successful, the 65-plus population and its needs will increase.

Not only are the medical needs of the population increasing, but dwindling family sizes are also reducing the size of seniors’ safety nets. The total fertility rate (TFR) stood at 3.65 in 1960 during the so-called Baby Boom, meaning there were an estimated 3,500 births per 1,000 women, or approximately 3-4 children per family. However, since 1972, when the Baby Boomers were having children, it has remained below “replacement” level, which is 2.1 or 2,100 births per 1,000 women, or approximately 2 children per family.

Since they bore fewer children than their parents, Boomers are facing a caregiver crunch in their golden years. Beth Mace, chief economist and director of outreach at the National Investment Center for Seniors Housing and Care, explains that the ratio of adult children aged 45-64 to one person over 80 stands at 7 to 1 today. It’s expected to shrink to 4 to 1 in 2030 and to a mere 3 to 1 by 2050 based on population projections from the U.S. Census Bureau.

With fewer family members to care for them in their old age, Boomers are more likely to rely on private services more than their predecessors. When it comes to living arrangements, Mace believes they will also be more open to senior living establishments than prior generations because of the “hippie/commune” culture they encountered as young people in the 1960s and 1970s and their widespread college attendance.

“They will be more used to institutional settings as opposed to the Greatest Generation, for whom it was more foreign to move into senior housing or institutional settings,” she says.

Mace predicts that in addition to senior housing, new types of services and living situations may crop up to serve this population, such as “Golden Girl-type arrangements,” with friends taking care of each other.

“As the opportunity to serve this growing cohort becomes more recognized, I expect creative entrepreneurs to pursue other yet-to-be-imagined solutions,” she says.

Health Care: Market Disruption and Innovation

Inova Urgent

The Inova Urgent Care center in Vienna, Virginia, is part of a bustling strip mall that includes restaurants and a pharmacy. The building was once a grocery store.
Wells + Associates

The growing need for medical care is clear, but what form will it take and what spaces will it occupy?

Mark Stapp, executive director of the master of real estate development program at Arizona State University, says that technology, particularly the smartphone, is disrupting the health care market just as it has disrupted other industries. According to Stapp, the Affordable Care Act and the national dialogue about health care that it sparked “converged with the emergence of technology that connects people to services and allows consumers to have more choice, to better control their own lives.” He says that patients having access to and control over their own data has enabled the consumer side of the health care market to push the supply side more than ever.

“We are seeing experimental models for how to attract users — market competition is now improving the patient experience,” Stapp says.

Just as consumers can use online platforms and smartphone applications to request food delivery or compare household products, they can now complete a number of tasks associated with their medical care electronically. For instance, patients can request medical appointments or records, receive medical results and compare medical services using online platforms. Before arriving for an appointment, they can submit personal information rather than arrive early to fill out paperwork. A critical innovation is the ability for patients to maintain their own medical records, so they can bring them to specialists rather than request a primary care doctor send them — a task which can take a non-trivial amount of time and create costs for patients and providers.

Such advances are already saving substantial time and money for both patients and providers, an important achievement since health care costs continue to outpace the industry’s share of U.S. gross domestic product (GDP). According to Marcus and Millichap’s 2018 Medical Office Report, per capita costs have exceeded $10,000 per year since 2016. Health care expenditures are only projected to grow, from 13.3 percent of GDP in 2000 to nearly 20 percent by 2026.

For example, a 2018 study in Health Affairs analyzed the impact of an electronic consultation platform and found that patients who had an eConsult rather than a face-to-face visit saved a monthly average of $82 in episode-of-care costs per patient. The authors argue that “expanding the use of eConsults…could result in substantial savings while improving access to and timeliness of specialty care and strengthening primary care.” Virtual doctor visits are also on the rise; another 2018 study in Health Affairs concluded that expanding what is being called “telemedicine” may increase access to care and reduce costs.

The Decentralization of Health Care

When the Baby Boomers do start frequenting the doctor’s office three or more times a year, it may look different than they’re used to, in a good way, Stapp explains.

“Health care providers are competing for patients who expect more efficient service, so they are bringing health care to us, creating places that are accessible and desirable, and emphasizing the quality of experience,” he says.

To better serve choosier consumers, providers are increasingly unbundling medical care, peeling off services that were traditionally offered only at large medical complexes like hospitals and delivering them to consumers in more targeted ways. Marcus and Millichap reported in 2018 that developers are focusing on “off-campus locations,” and medical providers are “[expanding] services into neighborhoods and locations farther away from hospitals and major medical centers.”

Health care companies are also facing new market competition. According to Eric Johnson, national director for Transwestern’s Health care Advisory Services Group, large retailers are getting into the health care game.

“Companies like Amazon and Walmart are looking to provide health care services to patients in more convenient ways and at lower costs,” he says. This is all good news for the older adult population. No matter how Baby Boomers decide to live in their later years, by aging in place, living with family or entering age-restricted housing, medical services are likely to be closer to them and more accessible than ever. Specific services like urgent-care clinics, kidney dialysis centers, primary care practices and specialist practices will be positioned in smaller locations in more suburban, mixed-use environments near where Boomers are likely to be living or doing their daily errands.

The New Medical Real Estate: Retail

For health care moving into neighborhoods, what is the commercial real estate segment of choice? Based on recent data, it appears to be retail space, thanks to its convenience and proximity to target populations.

The portfolio strategy team at CoStar analyzed its medical office and medical tenant data and found that while most medical tenants occupy office properties (70 percent), the next largest category is retail property (18 percent), with the remaining 10 percent occupying industrial and flex or R&D properties. Medical tenants have doubled their presence in retail properties over the past decade. In 2008, only 1.5 percent of retail occupancy was medical, growing to 2.3 percent in 2013 and to 2.9 percent in 2018. Medical tenants in retail properties now represent 150 million square feet of inventory. The share of office properties that are medical also grew from 5.2 percent in 2008 to 7.7 percent in 2018. Therefore, although medical tenants grew in both office and retail sectors, over the same decade they increased their presence in retail space at twice the rate. 

Further, among all medical office tenants, only 13.6 percent leased retail spaces in 2008, while more than a third (33.5 percent) did in 2018. During the past decade, medical tenants have slightly decreased their presence in office properties (73 percent to 69.8 in 2018), as well as their presence in all other property types, such as industrial and flex properties.

The data also support the observation by the development community that ambulatory care is the type most likely to move into retail space. Medical tenants in retail space fall into five economic subcategories, and health practitioners and health care services — which cover services considered ambulatory care — represent 62.1 percent of all medical tenants in retail properties according to CoStar. Within these two categories, the top industries for medical office in retail properties are dentist offices (18.2 percent); offices of other health care practitioners (17.5 percent); outpatient care centers (9.7 percent) and physician offices (9.3 percent). The remaining categories — hospitals, nursing and residential care, and social assistance — refer primarily to in-patient medical services and social support programs.

Johnson explains that “hospitals will continue to move care outside their four walls to better address an array of primary, ambulatory and community-based care. This will include moving closer to the patient through retail locations, telemedicine and home health.” Further, he says that hospital systems are increasingly catering to millennials, who “do research and demand convenience, technology and cost consciousness.” He says hospitals are trying to figure out how to best deliver care to this generation, which “wants health care at its fingertips or down the street. Retail properties play into this strategy nicely.”

A prime example of this strategy is Duke Health’s renovation of a defunct shopping mall in Durham, North Carolina. They are in the process of consolidating outpatient and primary care services into one 185,000-square-foot space. The new specialty clinic will provide internal medicine, primary care, urgent care, women’s health, pediatrics, some orthopedics and cardiac care in one convenient residential location that is highly visible and easily accessible by local highways.

In addition to the convenience of retail locations, health care companies are choosing to move into existing retail space due to its usually ample parking, according to the transportation consulting firm Wells + Associates. Patients need to be able to park in close proximity to medical services, since they may not be able to walk far. Retail space also enables medical providers to open under tighter timelines and with less commitment than new construction.

Further, vacant parking lots associated with underutilized retail space present development opportunities in themselves. Unused parking surrounding mall properties can be converted to pad site development relatively quickly when compared to greenfield development.

The movement of health care into retail space is symbolically fitting, since in many ways the industry wants to create a relationship with customers similar to that of retail. As Johnson explains, “We will continue to see health care take lessons from the retail and hospitality sectors with regards to the patient experience. Providers will create faster, much less expensive delivery models that will result in a better overall patient experience, but mostly at the outpatient level.”

Cowork Med

This rendering of a Cowork Medical office shows examination rooms, individual offices for physicians and conference rooms.
Galloway Graphics

Coworking for Doctors Comes into Focus

Today, more physicians are being employed by health care organizations rather than setting up their own independent practices, a trend in primary care that may begin affecting real estate. Opening a practice comes with considerable startup costs, and many younger doctors cannot afford them given the high cost of medical school and associated student debt. The Physician Foundation reports in its 2018 survey of physicians that while 48.5 percent of doctors maintained an independent practice in 2008, only 31 percent do today. For those who wish to stay in private practice, it can be daunting to build out a space before establishing a steady patient base.

To address this situation, physician Reza Mirali and his partner Reza Shahabadi, a commercial real estate professional, have launched Cowork Medical (, a network of coworking spaces specially outfitted for primary care. Its inaugural location, in Chevy Chase, Maryland, a high-income suburb of Washington, D.C., is in a traditional medical office building and provides Class A consultation, exam and procedure rooms. By taking on the challenges of office buildout, Cowork Medical enables doctors to practice in a location they could not afford on their own, and with more square footage (1,500) than they could carry on their own. As a member of Cowork Medical, a doctor simply puts his or her name on a directory in the main lobby and, when seeing patients, uses an app to sign up for a private exam or procedure room within the space.

Mirali says working for a health care company rather than oneself puts pressure on doctors to spend too little time with patients, an outcome that both erodes the quality of care and drives doctors away.

“Doctors are rewarded by relative value units (a measure of value used in the Medicare reimbursement formula) that don’t necessarily capture quality of care,” he says. “When I have to see 40 patients in a day or my salary is being cut, I’m not going to be doing as good a job because I’m talking to patients for five to 10 minutes rather than 20-30 minutes.”

Especially given that there is a serious physician shortage on the horizon, according to the Association of American Medical Colleges, these disincentives to entering primary care should be addressed. Further, Mirali believes that this model is contributing to the rising costs of health care.

“You would think that conglomerates would have economies of scale that help lower costs, but they don’t,” Mirali says.

To support high-quality primary care that serves both doctors and patients well, Cowork Medical is trying to make private practice feasible again. In addition to providing the flexible office space, the group is providing wrap-around administrative support services like practice management, professional accounting and legal services to doctors who lease with them. This new way of structuring medical space not only takes the risk out of setting up an office, but it also allows doctors to craft their own schedules and workloads. Doctors can lease only what they need as they build up a patient base without the pressure of a large mortgage or rent payment each month.

“We are not the first coworking model, but the most comprehensive. What distinguishes us is that we’re not only a space — we also provide the management, and we’re going to provide the resources doctors need as their practices grow,” says Mirali.

Medical Space: The Next Creative Opportunity in CRE

The steady growth of health care is drawing more developers and service providers into the industry. But in order to be successful, they must understand the complexities underlying the strong demand for medical services. An aging population coupled with fewer people to take care of them is driving demand for a host of medical services and senior-living support structures. However, Americans are simultaneously expecting convenient, efficient service that they can access through online platforms and smartphone applications. Retail locations are increasingly being used as the CRE of choice for ambulatory care, but governmental restrictions, like zoning rules, may still be an impediment to health care entering the spaces consumers would like to frequent.

Although health care services are cropping up in smaller, more convenient locations, providers continue to be large health care companies rather than independent practitioners, which may not produce the value that consumers expect or the experience doctors desire. As the Boomers age in the coming decades, there are opportunities for creative solutions, such as coworking for doctors, to emerge and provide yet more options to patients. The health care real estate market will reward not only developers who invest in the growing medical office market but also those who innovate and find new ways to support medical services that are efficient and accessible for both consumers and providers.