Demand for medical office buildings expected to flourish

A large real estate company believes growth will emerge from an increased call for outpatient services and a stronger desire for physician alignment.

By — Posted Jan. 17, 2012

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A large commercial real estate company says it expects great interest in the purchase of properties focused on ambulatory care in the year ahead.

Investors are looking for stable places to put their money after several years of market volatility. Some buyers may be counting on increased demand for medical office space as hospitals seek closer ties with physicians in accountable care organizations and millions more become insured under the Patient Protection and Affordable Care Act.

That is the word from Jones Lang LaSalle, which released its annual forecast for health care real estate conditions on Dec. 21, 2011. Most medical real estate transactions are expected to come from buying and selling ambulatory rather than inpatient facilities.

"Medical office buildings have never been an explosive asset class," said Shawn Janus, managing director of Jones Lang LaSalle's health development programs in Chicago. "They have been a much more stable investment with a predictable yield, but [health reform] has made them much more attractive now. There's a lot of capital chasing that asset class. And the whole environment is changing from inpatient to outpatient. Hospitals are trying to get closer to their patient base and to physicians."

However, the company said small office buildings would draw less interest unless they're owned by a medical group with strong hospital ties. These connections may increase the credit-worthiness of a medical practice tenant, which may increase the building's value.

Buyers include health care real estate investment trusts that amassed large amounts of money during the recession, when investors looked for safe places for their dollars.

Jones Lang LaSalle believes new medical offices will be built, although they will be larger than in the past and include ambulatory surgery and imaging facilities. The company expects the facilities to be in the range of 100,000 to 200,000 square feet, and possibly more.

Analysts say the increase in building activity, combined with a glut of nonmedical commercial properties that could be repurposed, means that physicians looking to lease space may find bargains.

Health care construction was strong even during the economic downturn. A total of $39.2 billion was spent on health care-related construction in November 2011, according to data from the U.S. Census Bureau released Jan. 3. This represented a growth of 1.9% from the $38.4 billion expended in October 2011. The total amount of money spent on any construction grew 1.2% from $797.4 billion in October 2011 to $807.1 billion in November 2011.

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