Office Building Demand Up, Rebuilds Slow

U.S. realtors are expecting a surge in the need for medical office properties and part of that need will be filled by renovating old buildings that are no …

U.S. realtors are expecting a surge in the need for medical office properties and part of that need will be filled by renovating old buildings that are no longer being used, particularly in the retail sector, but many repurposing projects are slow to get off the ground. Interest is there, however, particularly due to more developers angling for LEED status, because repurposing an old building wins points toward accreditation. The projects are expensive, though, because turning a former retail space into a medical office often requires specialized renovation plans that may require gutting the entire property. For more on this continue reading the following article from National Real Estate Investor.

With the expected demand surge for medical office in the next few years, developers such as Duke Realty say a major trend for medical office this year would be the buy-up of vacant retail property for renovation, particularly the ghost buildings that defunct chains vacated due to the recession and obsolescence.

The demand surge is still underway. Medical office building (MOB) vacancy has dropped nationally to about 10.5 percent from the 15 percent peak in 2009, with absorption of current centers continuing at a steady pace. The Urban Land Institute expects 64 million sq. ft. of additional medical office will be needed by 2024.

LEED’s the way

What has brought MOB renovation plans to the forefront of executives and investors is another new trend: Repurposing, which is basically another way of saying, “We’re going to use an old building so that we won’t overuse resources and take up less of an environmental footprint.” Standards such as the U.S. Green Building Council’s LEED certification give points for repurposing, and LEED has become an acceptable buzzword for companies to tout when listing green initiatives.

For example, next week Kaiser Permanente is opening a medical office in a former 32,000-sq.-ft. Circuit City store in East Portland, Ore. The office replaces a lease run-out at Division Medical Office in the city, and expands the office by one-third the space. The office is also expected to be LEED-Health Care Gold certified. Because the company used an existing building, the project required fewer construction materials and allows the city to recover again on tax revenue, according to a Kaiser statement. The company says it has already repurposed more than three million sq. ft. as it builds new medical centers, including a research facility going into a former Great Indoors store in the Chino Hills neighborhood of Los Angeles.

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Metzler Real Estate in Chicago recently hired MBRE Healthcare Group to investigate the conversion of the vacant Saks Fifth Avenue department store in Highland Park, Ill. into a medical office building. Marc Westmeyer, a vice president at MBRE, says retail repurposing to MOB is an efficient use of space for a growing demand. Andrew Davidson, an executive vice president at the company, says the former Renaissance Place anchor in the North Shore neighborhood is within 15 miles of 15 separate hospitals.

“People today go to hospital groups, in many cases, for convenience,” Davidson says. “These are the feeders into the larger system. So they want to have their MOBs near the patients, they are starting to have a patient-centric mentality.”

He admits it will be an expensive rehabilitation project to get a MOB tenant, with the gutting of the interior, new plumbing and even new elevators needed. “This is a substantial retrofit, but we think the rents will justify the dollars spent, we think hospitals will want to be in this center of an affluent community,” Davidson says.

Other projects have also been successful, such as Convey Health Solutions renovating a former Target store into a call center in Yuma, Ariz. and Memorial Care Medical Group last year signed an 11-year lease to occupy a former Border’s store in Los Altos, Calif. Maury Regional Medical Center (MRMC) signed a lease with Hull Storey Gibson Companies LLC (HSG) last year to occupy 33,537 sq. ft. in the Columbia Mall in Columbia, Tenn.

Even so, the retail-to-MOB trend hasn’t yet materialized in 2013. Developers and hospital chains have focused more on new development, with more than 8 million sq. ft. now under construction.

The redevelopments have dwindled due to a number of reasons, including the general unease about the rules in the Affordable Care Act (ACA), and zoning and cost concerns. Repurposing a retail facility can reportedly cost up to $200 per sq. ft. because of the need to construct new interior walls and infrastructure. Also, both the ACA’s rules and traditional medical office zoning requires different setbacks, parking and other issues that make redoing a retail property more tricky than it seems. There are still the cost and zoning issues, and whereas the retail building is traditionally in a high-traffic area, it’s not always going to be the best place for a medical office, say industry experts. And retail owners may not see patients as the best draws for their stores. 

In a worst-case scenario, the leadership in Philadelphia recently approved a proposal to prohibit new medical offices in the northeast section of the city. The bill’s sponsors, councilmen Brian O’Neill and Bobby Henon, say there are too many medical facilities in their neighborhoods, but others say the real intent of the law would be to keep out methadone clinics. The bill is going to the mayor to sign, though the city’s Planning Commission has recommended rejection of the bill.

This article was republished with permission from National Real Estate Investor.


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