Colliers US Medical Office Report 2014 Outlook

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Colliers US Medical Office Report 2014 Outlook

  1. 1. 2014 OUTLOOK | MEDICAL OFFICE UNITED STATES HIGHLIGHTS Medical Office Trends and 2014 Outlook ANDREA CROSS National Office Research Manager KEY TAKEAWAYS UNITED STATES MARKET STATS YEAR-END 2013 2012 2011 U.S. healthcare employment average annual growth 1.9% 2.0% 1.8% FIRST HALF* 2013 2012 2011 12.26% 12.25% 12.56% Overall vacancy rate Leasing activity 4.54 MSF 4.76 MSF 4.73 MSF Absorption 1.56 MSF 2.52 MSF 1.41 MSF Asking rent PSF (weighted avgerage) Construction completions $23.79 $23.80 $23.82 • Drivers of health care demand: In the short term, an additional 32 million people insured by the Affordable Care Act (ACA); long term, more than 20% of the U.S. population will be 65 or older by 2029. • ACA regulations mean more consolidation among health care providers and insurers, further tilting medical office demand to large companies. • Medical office accounts for 25% of all U.S. office space under construction. Construction has decreased significantly since the recession: 1.8 MSF in 1H 2013 vs. 8.4 MSF in 1H 2009 (markets tracked by Colliers). • Decrease in construction is attributable to conversion of non-traditional properties, especially big box retail and suburban shopping centers, and uncertainly regarding impact of ACA on health care delivery mechanisms. • Investment: $2.47B of medical office transactions in Q4 2013 was highest since Q4 2006, exceeding even the Q4 2012 surge prior to 2013 tax increases. 2014 should be a strong year, given scarcity of properties, availability of capital, and opportunities in secondary/tertiary markets. 1.01 MSF 2.61 MSF 1.53 MSF Square footage 1.82 MSF 4.19 MSF 5.76 MSF under construction *In 32 surveyed Colliers markets INVESTMENT STATS YEAR-END 2013 2012 2011 MOB transaction volume $7.17B $6.66B $5.76B FOURTH QUARTER 2013 2012 2011 Average price paid PSF $225 $208 $198 Average cap rate 7.40% 7.72% 7.79% SOURCES: Bureau of Labor Statistics, Real Capital Analytics, Colliers International www.colliers.com SOURCE: Bebeto Matthews/AP
  2. 2. HIGHLIGHTS | 2014 OUTLOOK | MEDICAL OFFICE | UNITED STATES Health Care Trends The U.S. health care industry is undergoing a seismic shift due to longterm changes in demographics, and near-term structural and policy changes. Compounding the long-anticipated surge in demand for health care services from the aging baby boomer population, the passage of the Affordable Care Act (ACA) is expected to add 32 million to the ranks of the insured. At the same time, implementation of ACA regulations concerning patient care, cost control, electronic recordkeeping, etc., will fundamentally alter the business models of health care providers of all sizes. ANNUAL PHYSICIAN OFFICE VISITS BY AGE | PER 100 PEOPLE 700 600 500 400 300 DEMOGRAPHICS During the next ten years, the population aged 65 and over is projected to increase an average of 3.3% per year, resulting in an increase of nearly 17 million people in this cohort by 2023. (By comparison, total population growth during the same period is projected to average only 0.8%.) By 2029, the 65+ age cohort will account for more than 20% of the U.S. population, up from 13.7% in 2012. 200 100 0 Under 15 years 15-24 25-44 45-64 65-74 75+ SOURCE: CDC, 2010 National Ambulatory Medical Care Survey U.S. POPULATION 65 YEARS AND OLDER IMPACT OF ACA: CONSOLIDATION, DISRUPTION 25% 80 70 20% 60 50 15% 40 10% 30 20 5% 10 30 20 28 20 26 20 24 20 22 20 Pop 65+ (Mil.) 20 20 18 16 20 20 20 20 14 0% 12 0 65+ % of Total Pop SOURCE: U.S. Census Bureau With the delay of the employer mandate and the troubled launch of the Health Insurance Marketplace website (healthcare.gov), the timing of the ACA rollout is unclear. However, its impact on the health care industry and real estate market will be profound—and not just in terms of an additional 32 million insured individuals upon implementation. The ACA also aims to rein in health care costs and improve the quality of care through a variety of measures that will fundamentally change the industry. U.S. health care spending is by far the highest in the world, about 50% higher on a per-capita basis than second-ranked Norway. Also, health care spending as a percentage of GDP increased significantly during the last 60 years, to nearly 18% in 2009. (The percentage was flat between 2009 HEALTH CARE JOBS AS SHARE OF TOTAL WORKFORCE | LARGE METROS This growth will translate into a substantial increase in demand for medical services, due to the greater need for health care among the older age cohorts: The annual number of physician office visits per 100 people in the 65–74 year-old cohort is nearly 70% higher than in the 45–64 year-old cohort. 25% Demand for health care will likely remain strong across geographic locations. Northeast and Midwest metro areas tend to have above-average concentrations of health care workers because of their relatively older populations, who demand greater amounts of care. However, Sunbelt cities in the South and West dominate the list of fastest-growing metro areas for health care employment, supported by above-average population growth. In-migration to Sunbelt metro areas should increase further as job prospects in these areas improve and the recovering housing market enables greater household mobility in the United States. With large, in-place senior populations in the Northeast and Midwest, and rapid population growth in the Sunbelt, demand for medical office space should increase across a broad range of geographies. 10% P. 2 | COLLIERS INTERNATIONAL 21.9% 20% 15% 18.1% 17.8% 17.1% 17.1% 16.7% 16.6% 16.4% 16.3% 16.3% 12.7% 5% Du rh am -C M cA lle n, ha TX pe lH ill, Ne NC w Ha ve n, W or CT ce st Yo er ,M un gs A to Sc w n, ra Pr OH nt ov on id -W en ce ilk ,R es -B I ar re ,P Al len A to w n, Cl PA ev ela nd Ph ,O ila H de lph UN ia, IT PA ED ST AT ES 0% SOURCE: EMSI 2013.3 Class of Worker data. Includes QCEW Employees, Non-QCEW Employees & Self-Employed
  3. 3. HIGHLIGHTS | 2014 OUTLOOK | MEDICAL OFFICE | UNITED STATES FASTEST-GROWING METROS FOR HEALTH CARE & SOCIAL ASSISTANCE EMPLOYMENT MSA 2012 JOBS 2013 JOBS 80,073 84,658 21.9% 309,332 325,411 18.1% 39,116 40,953 17.8% Grand Rapids, MI 56,336 58,801 17.1% Las Vegas, NV 75,041 78,288 17.1% Knoxville, TN 46,322 48,238 16.7% Virginia Beach, VA 89,627 93,312 16.6% Nashville, TN 111,969 116,567 16.4% Atlanta, GA 242,277 252,179 16.3% Austin, TX 86,429 89,939 16.3% El Paso, TX 39,570 41,170 12.7% Richmond, VA Houston, TX Boise, ID % CHANGE SOURCE: EMSI 2013.3 Class of Worker data. Includes QCEW Employees, Non-QCEW Employees & Self-Employed 20% 16% 14% 12% 12.5 10% 8% 13.8 14.5 16.2 16.4 16.8 15.4 15.9 16.0 16.1 17.9 17.9 17.9 9.2 6% 7.2 5.2 4% 2% 0% 0 6 19 70 980 990 000 001 002 003 004 005 006 007 008 009 010 011 2 1 1 2 2 2 2 2 2 2 2 2 2 2 19 SOURCE: Center for Medicare & Medicaid Services HEALTH EXPENDITURES PER CAPITA $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 S ay nd ds ia da ny ark rg ce um en lia nd om nd 34 a m ou an gi ed tra la d la D TE rw rla lan str na e TA No itze her Au Ca erm en emb Fr Bel Sw us Ir King Fin EC S A G D x O t d D Sw Ne Lu ite TE NI Un U Note: Data is for 2011 or most recent available year SOURCE: OECD Health Statistics 2013; WHO Global Health Expenditure Database The ACO component of the law is rapidly accelerating the consolidation trend in the health care industry, as larger hospital systems are better positioned to handle the scale, complexity and capital costs of establishing and maintaining these networks. Larger hospital systems also benefit from greater negotiating power with insurance companies. Although still well below peak deal volumes during the last hospital mergers and acquisitions (M&A) boom in the late 1990s, 105 M&A deals occurred in 2012, more than double the annual average of 55 between 2005 and 2009. Booz & Company estimates that 1,000 of the 5,000 hospitals in the U.S. could attempt to merge with another hospital during the next five to seven years. Recent large transactions included: NATIONAL HEALTH EXPENDITURES AS A PERCENT OF GDP 18% and 2011, largely attributable to the recession and increased generic pharmaceutical sales due to patent expirations.) In just ten years, the average cost of a hospital stay increased by 90%, according to the Health Industry Distributors Association, reaching more than $33,000 in 2010 due to higher premiums, increased technology costs and greater consumer usage of laboratory tests. One way the law seeks to reduce costs is the introduction of Accountable Care Organizations (ACOs), which are intended to improve patient care through better communication and coordination among providers, offering financial incentives for successful, lower-cost outcomes. • Mount Sinai Medical Center’s merger with Continuum Health Partners, owner of Beth Israel Medical Center, St. Luke’s and Roosevelt Hospitals, and New York Eye and Ear Infirmary, completed in September 2013; the combined system will have approximately 36,000 employees (including 6,600 physicians), 3,500 hospital beds, and 200,000 inpatient admissions and 2.5 million outpatient visits annually; • Completed in October 2013, Dallas-based Tenet Healthcare’s acquisition of Nashville-based Vanguard Health Systems for $4.3 billion; the expanded company employs more than 100,000 people and operates 173 outpatient centers, 77 acute care hospitals, five health plans and six ACOs; • Community Health Systems of Tennessee’s recent acquisition of Florida-based Health Management Associates for $7.6 billion; the company now totals 206 hospitals and approximately 27,000 physicians. HOSPITAL MERGERS & ACQUISITIONS 120 100 67 52 80 40 60 40 16 38 22 38 34 22 20 0 34 32 22 2005 2006 22 16 2007 2008 2009 For-Profit Buyers 36 41 38 24 2010 2011 2012 2013* Nonprofit Buyers *Year to date, August 2013 SOURCE: Irving Levin Associates COLLIERS INTERNATIONAL | P. 3
  4. 4. HIGHLIGHTS | 2014 OUTLOOK | MEDICAL OFFICE | UNITED STATES PHYSICIANS BY EMPLOYMENT STATUS 500,000 400,000 300,000 200,000 100,000 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 * 0 Estimated count of independent physicians Estimated count of Healthcare System-employed physicians *Projected SOURCE: AMA, Accenture, Becker’s Hospital Review Cost pressures also are spurring alliances and affiliations between health care systems, even competitors. Southern California health care titans UCLA Health System and Cedars-Sinai Medical Center recently signed a 15-year lease at the former general care Century City Hospital in Los Angeles, which has been vacant since 2008. In partnership with Select Medical Holdings Corporation, a Pennsylvania-based rehabilitation facility operator, they will open a 138-bed state-of-the-art acute rehabilitation hospital in 2015, following extensive renovations to the 170,000 square-foot facility. Other recent examples include two partnerships in North Carolina: UNC Health Care’s assumption of operations management for non-profit Nash Health Care; and Duke LifePoint, a joint venture between Duke Health and LifePoint Hospitals. The trends of consolidation and strategic alliances— particularly for smaller community hospitals—will likely continue with the implementation of the ACA and its associated challenges. Another significant trend is the integration of large health care providers with insurance companies. Alignment of provider and insurer interests creates greater incentive for successful patient outcomes without prescribing excessive tests and treatments, thus containing costs while providing highquality care. Examples of these integrated systems include UnitedHealth, Kaiser Permanente and HealthPartners. Health systems also are forging alliances with insurers to create fully integrated systems to boost provider collaboration, improve outcomes and lower costs, such as Blue Cross’s Aligned Incentives Contracts program. Ten large health systems are participating in the program, including Allina Integrated Medical Network, which announced the creation of BluePoint, a new integrated health plan with Blue Cross Blue Shield of Minnesota, in August 2013. Smaller physician practices are being acquired and folded into larger health care systems due to cost pressures and uncertainties regarding the implementation and effect of the ACA. The percentage of independent practicing physicians has declined from 57% in 2000 to a projected 36% in 2013. According to an Accenture survey, the greatest concerns facing physicians were business expenses (87%), the prevalence of managed care (61%) and maintenance of electronic health record (EHR) requirements (53%). Also driving this trend is a projected physician shortage, prompting health care systems to acquire independent physician practices. | COLLIERS INTERNATIONAL 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 90% 78.4% 71.8% 80% 70% 57.0% 60% 48.3% 51.0% 48.1% 42.0% 50% 39.6% 34.8% 33.9% 40% 29.2% 27.9% 23.9% 21.8% 30% 20.8% 16.9% 18.2% 17.3% 17.3% 20% 10.5% 11.8% 10% 0% 600,000 P. 4 U.S. OFFICE-BASED PHYSICIANS WITH EMR/EHR SYSTEMS (%) Any EMR/EHR system Basic system Note: “Any EMR/EHR system” is a medical or health record system that is all or partially electronic (excluding billing systems); “Basic system” meets certain functionalities SOURCE: CDC, NCHS Data Brief #143, January 2014 Many office-based physicians seek to implement EHR systems in order to reap financial incentives from Medicare and Medicaid. Created as part of the American Recovery and Reinvestment Act (ARRA) of 2009, the Health Information Technology for Economic and Clinical Health (HITECH) Act includes incentive programs that reward participants who demonstrate “meaningful use” of EHR systems that meet certain criteria. Participants must meet the specific objectives of each of the three stages of the programs, focused on the creation of electronic health information (Stage 1), the exchange of this information (Stage 2), and the use of this information to improve patient outcomes (Stage 3). Payments to providers meeting Stage 1 criteria began in 2011, and Stage 2 payments will begin in 2014. In addition, Medicare and Medicaid providers that do not meet the program requirements will be subject to financial penalties beginning in 2015. Although adoption of EHR systems continues to grow, the percentage of physicians with systems that meet the criteria for Stage 2 incentives is low. According to the National Center for Health Statistics (NCHS), the percentages of office-based physicians with any EHR system or a basic EHR system have been trending upward since 2006. However, among physicians that plan to participate in the Medicare or Medicaid incentive programs, just 13% have a system that can handle 14 of the 17 Stage 2 core objectives, according to the most recent survey. Furthermore, this understates the percentage of providers capable of meeting the Stage 2 requirements, as the HITECH incentive program requires that providers meet all 17 core objectives, as well as three out of six additional “menu” objectives. The ability of physicians to meet the requirements of the HITECH program will be a key trend to monitor, potentially contributing to a continued increase in the share of hospital-employed physicians given the difficult of implementing qualified EHR systems independently. Technological developments also are transforming the health care landscape and driving the consolidation trend. Improvements in, increased patient comfort with, and the cost-effectiveness of medical technology practices are expected to drive increasing demand for telehealth and mobile health (mHealth) systems, ranging from online appointment scheduling to remote patient data collection and monitoring. With the ACA emphasizing cost containment, interest in lower-cost delivery mechanisms such as
  5. 5. HIGHLIGHTS | 2014 OUTLOOK | MEDICAL OFFICE | UNITED STATES these will likely increase. Again, large organizations with the capital to invest in these technologies and deploy them across a range of facilities and specialties are well-positioned to capitalize on this trend. This consolidation trend is likely to continue, and has significant implications for the medical office market, both in terms of leasing activity and construction of new facilities. The shift to the ACO model will likely result in a continued increase in the number of hospital-employed physicians due to the cost of running these programs, which will favor large organizations that benefit from economies of scale. This will contribute to stronger tenant demand from large heath care systems rather than small physician practices. MEDICAL OFFICE VS. TRADITIONAL OFFICE 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 1H09 1H10 CBD Medical Office Market Colliers’ medical office data includes on-campus, offcampus, single- and multi-tenant medical office buildings totaling 10,000 square feet or more, as well as office buildings in which medical tenants occupy 50% or more of the space. Our coverage universe includes 39 U.S. markets encompassing approximately 337 million square feet of medical office space. Our historical time series, beginning in 2009, includes 32 U.S. markets totaling 304 million square feet. As we build our inventory database, we will add markets to future iterations of this report. 2H09 2H10 1H11 Suburban 2H11 1H12 2H12 Note: Medical office data includes 32 U.S. markets SOURCE: Colliers International to the recession and had above-average medical office vacancy rates as of 1H 2013. Construction has fallen off sharply since then in most of these markets, and thus demand going forward will drive the absorption of existing space with limited competition from new product. LOWEST OVERALL VACANCY RATES | 1H 2013 MARKET OVERALL VACANCY RATE Greenville-Spartanburg, SC Despite major changes occurring in the health care industry and the deepest recession since the 1930s, the medical office market has been stable compared with other commercial property types, including traditional office properties. Long lease terms (typically 7–10 years), as well as the expensive and extensive tenant improvements required by medical users, lend stability to the medical office property type. The vacancy rate increased from 12.29 percent in 1H 2009 to 12.82 percent in 1H 2010, and since then generally has trended downward, lowering to 12.26 percent in 1H 2013. By comparison, the vacancy rate for traditional office increased more substantially during the recession and remained elevated in 1H 2013 relative to medical office properties. Medical office rental rates also were relatively stable, decreasing by less than $1 per square foot to $23.79 in 1H 2013 compared with $24.65 in 1H 2009. Net absorption remained positive throughout this period, and the amount of both construction completions and construction underway decreased significantly. Small southeastern markets lead the list of the lowest vacancy rates as of 1H 2013. Although not immune to the effects of the recession, new supply levels were very low in most of these markets in the years leading up to and following the downturn, contributing to current low vacancies. In contrast, substantial construction in many larger Sunbelt markets—including many that had housing bubbles—led to a surfeit of vacant space in those areas, resulting in the highest vacancy rates nationally. Atlanta, Las Vegas, Phoenix and Tampa Bay-Clearwater all were active development markets prior 1H13 Medical Office 3.00% Savannah 3.80% Columbia, SC 4.30% Memphis 5.20% Richmond 6.30% Nashville 6.50% New York – Manhattan 6.50% Seattle 6.50% Milwaukee 7.22% Miami 8.37% SOURCE: Colliers International COLLIERS INTERNATIONAL | P. 5
  6. 6. HIGHLIGHTS | 2014 OUTLOOK | MEDICAL OFFICE | UNITED STATES UNITED STATES | MEDICAL OFFICE MARKET STATISTICS MARKET EXISTING INVENTORY (SF) JUN 30, 2013 Atlanta OVERALL VACANCY DIRECT RATE (%) VACANCY RATE (%) JUN 30, 2013 JUN 30, 2013 ABSORPTION 1H 2013 (SF) AVG. ANNUAL QUOTED RENT (USD PSF) JUN 30, 2013 YEAR-TO-DATE NEW SUPPLY (SF) UNDER CONSTRUCTION (SF) 16,166,458 13.60 13.10 95,580 22.53 47,500 100,786 Bakersfield 1,183,984 11.99 10.51 81,296 20.64 90,000 30,000 Baltimore 5,649,274 20.80 20.20 -16,935 24.02 51,524 52,000 Birmingham 1,711,119 23.61 23.61 -153,411 19.70 0 0 Boise 1,771,733 11.62 11.62 - 16.80 85,000 0 Charlotte 8,629,775 11.33 11.01 82,757 24.79 133,945 0 Chicago 23,621,725 14.80 14.50 103,618 21.09 168,180 51,400 Cincinnati 3,928,227 11.23 11.23 101,179 21.64 0 0 Columbia, SC 2,742,721 4.30 4.30 11,863 18.98 0 0 18,991,977 13.24 13.15 200,266 22.81 44,065 176,000 Denver 9,467,489 11.48 11.14 155,600 23.23 92,979 0 Detroit 4,370,087 41.50 41.50 10,566 19.47 0 0 Fort Lauderdale 6,359,878 9.59 9.47 96,585 22.96 0 38,670 Grand Rapids-Western MI 4,425,528 10.47 10.47 46,832 14.81 0 60,000 Dallas-Fort Worth Greenville-Spartanburg, SC 3,689,102 3.00 3.00 -12,695 13.54 0 0 26,664,926 11.30 11.10 467,399 23.02 30,000 0 Indianapolis 5,204,940 9.06 9.06 22,921 17.90 0 274,000 Jacksonville 1,381,502 25.60 24.90 -41,405 19.07 11,300 0 Kansas City 7,492,420 8.70 8.70 30,960 19.38 0 70,000 Las Vegas 5,282,610 22.35 22.30 -71,908 25.32 0 0 Long Island 9,182,894 8.90 8.80 57,127 27.04 0 74,999 27,087,400 10.80 10.50 -9,980 29.52 41,000 456,300 Memphis 5,845,782 5.20 5.20 83,686 19.21 0 0 Miami 8,272,147 8.37 8.36 -70,991 27.61 29,621 0 Milwaukee 6,600,916 7.22 6.99 -83,842 16.87 0 0 10,427,201 9.20 8.60 26,095 16.40 155,200 477,881 Nashville 7,769,000 6.50 6.30 -26,176 20.43 0 36,000 New York – Manhattan 3,700,418 6.50 6.40 72,790 40.16 0 0 Orange County 13,581,566 10.10 10.00 80,292 29.52 81,000 0 Philadelphia* 14,656,137 9.07 8.90 151,662 20.13 10,200 0 Phoenix 16,056,190 19.80 19.30 -12,733 22.70 18,000 0 1,760,772 9.80 9.80 -1,704 20.21 0 0 Houston Los Angeles County Minneapolis-St. Paul Reno Richmond 4,135,321 6.30 6.10 -29,646 18.91 0 0 12,912,815 12.49 12.23 142,468 28.24 65,076 0 Savannah 1,477,081 3.80 3.80 10,300 18.42 0 0 Seattle 6,966,672 6.50 6.10 -65,076 34.15 0 0 Tampa Bay-Clearwater 3,654,197 24.10 24.04 -12,399 18.81 21,145 0 San Diego County Washington, DC 16,359,466 9.80 9.50 113,178 29.66 76,504 382,267 8,210,280 14.31 14.14 -11,018 24.48 0 116,000 337,391,730 11.99 11.75 1,625,101 23.47 1,252,239 2,396,303 West Palm Beach TOTALS *Metro area, including counties in PA, NJ and DE. P. 6 | COLLIERS INTERNATIONAL
  7. 7. HIGHLIGHTS | 2014 OUTLOOK | MEDICAL OFFICE | UNITED STATES CONSTRUCTION Nationwide, medical office properties account for approximately 25% of all office space currently under construction, totaling 21.0 million square feet. Although the largest metro areas generally have the largest amount of space under construction, only 9 MSAs have more than 500,000 square feet underway. Indicative of the trend of health care providers locating near their patients, construction is spread out across metropolitan and micropolitan areas, as well as places too small for geographical categorization. However, in the 32 markets tracked by Colliers, medical office construction activity, especially speculative, decreased significantly in recent years, from nearly 8.4 million underway in 1H 2009 to just 1.8 million square feet in 1H 2013. One reason for the decline was the increased usage of nontraditional properties, notably retail, by medical tenants. Retail properties increasingly are being repurposed for medical uses as providers seek to locate close to patients and reduce costs by providing outpatient services in non-acute settings. High retail vacancy—particularly in suburban and exurban areas—due to overbuilding prior to the recession and housing crisis, and increasing online retail sales, resulted in opportunities for health care tenants. In particular, well-located “big box” retail properties in the 20,000-to-50,000 square-foot range with ample parking (such as those occupied by defunct tenants like Borders, Circuit City and Linens ‘n Things) are well suited for many medical tenants and are more accessible for patients than many urban campuses. Other types of retail space are being used as well, such as the Maury Regional Cancer Center at Columbia Mall in Columbia, TN, which offers cancer treatment, a pharmacy and other services in a large block of vacant mall space. Another example is Vanderbilt University Medical Center’s conversion of vacant upper-floor space at 100 Oaks Mall in Nashville, TN, for medical office and ambulatory center usage. Retail clinics will remain an important delivery mechanism as health care providers seek to cut costs and handle the surge in newly insured patients with the implementation of the ACA. Accenture expects the number of retail health clinics to double to more than 2,800 by 2015, handling 10.8 million patient visits and saving $800 million annually. The shift from on-campus, in-patient care to out-patient treatment in offcampus facilities is already well underway: According to an Avalere Health survey, inpatient hospital admissions averaged 111.8 per 1,000 people in 2011, down from 123.2 per 1,000 people in 1991. Also, outpatient visits increased to 2,105.6 per 1,000 people in 2011, up from 1,273.4 in 1991. Improvements in medical technology are also facilitating the trend toward non-traditional space, such as less invasive surgical techniques that allow for increased outpatient procedures in off-campus facilities. Health care employment statistics also underscore the broadening of delivery options for medical services. Although three subsectors—physicians’ offices, hospitals, and nursing/residential—still account for the lion’s share of medical employment, the outpatient care center and home health care subsectors have been expanding fastest for the last decade. HEALTH CARE SUBSECTOR EMPLOYMENT GROWTH 10% 8% 6% 4% 2% 0% -2% 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 Offices of Physicians Outpatient Care Centers Home Health Care 11 20 12 20 13 20 Nursing and Residential Hospitals Note: Growth rates are year-over-year; data are seasonally adjusted; latest data as of Dec 13 SOURCES: Federal Reserve Bank of St. Louis, Bureau of Labor Statistics, Colliers International As health care systems focus on cost containment, providers are integrating post-acute, transitional care units into outpatient facilities in order to keep patients out of the hospital. Other aspects of the ACA will contribute to this ongoing expansion of delivery mechanisms for health care, including new funding for the construction and expansion of community health centers, and the Community First Choice Option, which allows disabled patients access to home and community-based care rather than institutional care in a nursing home. SPACE UTILIZATION TRENDS Much of the space under construction is build-to-suit, and we expect this trend of customization for the specific needs and location preference of the tenant to continue. The preference of large medical systems for customizing their facilities as well as the risk of speculative development amidst uncertainty regarding the future of the health care industry will likely support this trend going forward. Also, in terms of project size, new construction will likely remain concentrated at both ends of the spectrum. With the ACA shifting the focus of treatment from volume of services to patient outcome, health care systems are demonstrating a preference for large, integrated facilities capable of handling multiple functions and providers in one location in order to maintain control over patient care. These facilities typically are 50,000–200,000 square feet and offer longer hours to accommodate a greater volume of patients than smaller properties. Complementing these large facilities are small clinics located near patients that focus on one or two specialties, such as urgent care or physical therapy. Like the traditional office market, medical tenants increasingly are desiring more efficient, open spaces that facilitate teamwork and communication. Many newer facilities and redesigned spaces have fewer private offices and more shared workspaces. Technology is supporting this trend, as team COLLIERS INTERNATIONAL | P. 7
  8. 8. HIGHLIGHTS | 2014 OUTLOOK | MEDICAL OFFICE | UNITED STATES 482 offices in 62 countries on 6 continents United States: 140 Canada: 42 Latin America: 20 Asia Pacific: 195 EMEA: 85 • $2 billion in annual revenue • 13,500 professionals and staff • 1.12 billion square feet under management members are able to work in multiple locations. Slated for delivery in 2016, the $450 million, 620,000 square-foot Brigham Building for the Future on the Brigham and Women’s Hospital campus in Boston is being constructed with the goal of creating greater interaction between physicians, researchers and patients. The building will consolidate employees from multiple locations into a single location and encourage interactions in hallways, cafeterias and other shared spaces through its design. Some newer buildings are also downsizing or eliminating large waiting rooms, using technology to more efficiently manage patient flow and providing smaller waiting areas for patients. Also similar to the traditional office market, some tenants are opting for part-time leases in medical suites in order to control costs. These leases enable tenants to secure space that meets their specific needs, with appropriate equipment and sometimes personnel provided, for only the amount of time that they need it. With health care providers focused on cost containment, technology usage and collaboration, these design and occupancy trends will have significant implications for tenant demand and development going forward. • $71 billion USD in total transaction value INVESTMENT CLIMATE COLLIERS INTERNATIONAL 601 Union Street, Suite 4800 Seattle, WA 98101 TEL +1 206 695 4200 FOR MORE INFORMATION Andrea Cross Office Research Manager | USA TEL +1 415 788 3100 EMAIL Andrea.Cross@colliers.com CONTRIBUTORS Jeff Simonson Senior Research Analyst | USA Jennifer Macatiag Graphic Designer | USA Aaron Finkelstein Communications Manager | USA COLLIERS HEALTHCARE SERVICES GROUP | National Directors John S. Wadsworth TEL +1 949 474 0707 EMAIL John.Wadsworth@colliers.com Jim Allen TEL +1 818 871 8534 EMAIL Jim.Allen@colliers.com Copyright © 2014 Colliers International The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. Accelerating success. P. 8 | COLLIERS INTERNATIONAL The historical stability of the medical office market and the projected growth in demand, due to both the aging baby boomer population and those newly insured by the ACA, are attracting substantial investor interest in the product type. The $2.47 billion in Q4 2013 medical office transactions was the highest volume since Q4 2006 according to Real Capital Analytics, exceeding even the surge in Q4 2012 in anticipation of tax increases in 2013. MEDICAL OFFICE INVESTMENT $, Bil. 8.0 9% 7.0 8% 6.0 7% 6% 5.0 5% 4.0 4% 3.0 3% 2.0 2% 1.0 1% 0% 0.0 2006 2007 2008 2009 2010 2011 MOB 12-Month Trailing Transaction Volume (left-axis) 2012 2013 Cap Rate (right-axis) SOURCE: Real Capital Analytics Medical office investment activity was dominated by domestic buyers during the last few years, with foreign buyers accounting for 1% of investment flow in 2012 and 2013, according to Real Capital Analytics. Foreign buyers such as ProMed Properties and Investcorp that were active in 2011, when crossborder flows accounted for about 12% of all medical office volume, have been nearly absent during the last few years, while domestic buyers including REITs, private equity and institutional funds have been aggressively raising capital for health care real estate. A limited supply of medical office properties is resulting in fierce competition for available assets, with buyers increasingly willing to consider secondary and tertiary markets as well as properties with lower occupancies by hospital tenants. The large amount of capital raised this year, coupled with the growing ranks of the insured due to the ACA implementation should support another strong year of medical office investment in 2014.

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