South Florida Hospital News
Monday May 25, 2020
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June 2006 - Volume 2 - Issue 12

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An Inside Look at the Health Care Real Estate Industry

To a greater extent than ever before, the health care industry seems to be closely linked to the real estate industry, and nowhere more so than in South Florida. South Florida Hospital News recently talked with four major leaders who are involved in the health care aspect of realty, and learned their thoughts on trends, changes, and challenges in this hot-topic area.

Fred Abbo, with more than 30 years of experience, is one of the largest private developers in Florida. He is the founder of The Abbo Group of Companies, which comprises more than 100 companies.

Charles Michelson is a principal in Saltz Michelson Architects, an architectural firm founded 30 years ago that, in part, provides architectural services to the medical community.

Bruce Rendina, who has 20 years of experience in health care real estate, founded Rendina Companies in 1998. Its core business is the design, development, financing, leasing and management of medical office real estate.

Kenneth Weston, President of Kenneth Weston & Associates, Inc., a medical real estate broker, developer and consultant, has specialized in health care real estate since 1978. The firm's services include physician and health care facility representation, project analysis and consulting, project marketing, commercial condominium development and conversions, and fee development.

All four have a well-established presence in South Florida and beyond. In many cases their answers to the questions are similar, which isn't surprising, considering that all are familiar with the industry and the market.

Let's read what these gentlemen have to say:

SFHN – Is health care real estate currently experiencing a boom, and if so, do you expect it to continue?

FA – Yes, the health care industry is definitely experiencing a boom, mainly because of the population growth. Baby Boomers are moving by the thousands to retire in South Florida, and they are of an age where health care services are required the most.

CM – There's a boom in the sense that the medical community is constantly changing. Patient needs change, technology improvements change, the equipment that is used to treat patients changes, advances in medicine change the way treatments are given to people. As those things change, the building environment around them changes. So the medical community needs to evolve on a continuing basis—from the hospitals to the doctors to the specialty offices that treat patients.

BR - Health care real estate is currently experiencing a boom because of several factors: A shift in the focus in health care from the (hospital) to the outpatient or ambulatory setting; shifts in the population growth from urban to suburban settings; the aging of health care facilities from the 1950s and 1960s; state and local building code regulations, such as the seismic requirements in California and hurricane strength in the South; and physicians motivated by ownership in real estate. This trend will continue for the foreseeable future because the above factors continue to impact the health care industry.

KW – Yes, especially in South Florida. Because of the large base of Baby Boomers, the competitive pressures of health care facilities, and the population growth patterns, the medical real estate market is definitely experiencing a boom. Almost all of the hospitals we've been involved with are either in or have been in expansion mode. They also have been more involved in new outpatient centers; and not only hospitals but all types of health care providers. They're basically expanding out into the emerging growth areas. These particular residential areas are growing so fast that they need health care facilities and practices. When we first got involved with one of the projects we're doing now, we looked at the overall vacancy rate at office buildings in the area and it was approximately 25 percent. But we noticed there were no medical facilities there. So even though the traditional real estate market showed that high vacancy factor, we were able to build a (medical) building and fill it up in six months. And the reason is that the residents and work force in that particular area had to leave that area for their medical services.

SFHN – How has health care real estate changed over past decade?

FA – We have observed in recent years that the doctors are tending to make their practices bigger by incorporating more doctors into their practices. Another tendency is the preference of the doctors to buy offices and condominiums, rather than rent. It's proved to be more effective for them as an investment and a practicality.

CM – As I mentioned before, the treatment of patients is constantly evolving, and in order to stay current, things have to change. Hospital and medical spaces have special needs and requirements, and there are a lot more specialties now than 20 years ago. A lot of additional treatments are available to patients, and as an architect, I have to respond to the needs of treating patients.

BR – There are a greater number of competitors in health care real estate development today, even more than just five years ago. As real estate has become a more attractive investment, and health care specifically, more investors have entered the market. With greater investment opportunities the value of medical office buildings has risen. There is an increased appetite for acquiring and developing MOBs. There has also been a shift toward a greater use of third-party developers to construct and finance health care real estate projects. As hospitals have directed their scarce capital resources to other needs, alternative methods of financing and constructing facilities have been explored.

KW – One of the two points that have caused health care real estate to change over the past decade is the emergence of outpatient facilities. Procedures that were typically done on campus are now being done outside of the hospital setting, in the walk-in health care centers. The other (change) is the emergence and growth of medical office condominiums. Ironically, we were one of the first to be involved with a medical office condominium, and—quite frankly—everyone at that point thought we were somewhat crazy because nobody had ever done one before. But what you're finding now is the emergence of situations where physicians have the option to purchase their own office space as opposed to leasing space, and that's taken place because of several issues. Over the past five years the stock market has been somewhat unstable, so physicians were looking for ways to diversify their income portfolio. Because of the high cost of their tenant improvement allowances relating specifically to plumbing, cabinetry, etc., those improvements go with the space once (the physicians) retire or sell the practice. And because of the low interest rates, this caused a major increase in the interest in office ownership.

SFHN – What are the differences between health care and other industries; and what are the special needs the health care industry has?

FA – Medical office buildings are typically more expensive than regular office buildings because of more stringent requirements in the areas of plumbing, elevators, electricity, etc. A typical medical building costs between 5 and 10 percent more than a regular office building. Land is another factor because you need to pay a premium to be able to have a specific location where the demographics are right. Also the cost of tenant improvements after the building has been delivered by the developer are usually more expensive because of the medical requirements.

CM – Health care businesses are very specific in terms of the requirements of the people who use them. For example, an accounting office is an accounting office; but a doctor's office has special needs for medical equipment, special needs for power, for air conditioning—above and beyond what might be needed elsewhere. In addition, you're dealing with a constant flow of people, and part of the service is making sure people have easy access in and out of medical facilities. So there are subtle differences between health care and public spaces.

BR – The relationship between physicians and hospitals has always been a unique one. With the numerous requirements and regulations governing this relationship, health care real estate transactions have to be structured so as not to negatively impact the relationship.

KW – When dealing with physicians or health care professionals, you have to have a great deal of patience and a great deal of knowledge relating to health care. Physicians over the years traditionally haven't been trained in business, so we try to educate them in the important issues relevant to health care real estate. We'll help them with demographic studies as to where they want to locate. When you specialize in health care real estate, you must provide local expertise that a lot of other people in the commercial real estate industry don't have. So knowledge of the market is probably one of the most important factors. Physicians and health care professionals are very busy. You need to determine what their criteria is, deal directly with them, and do it in a succinct manner. I had the opportunity to participate in a one-year internship at a hospital, which provided me with an insight into the health care industry and enabled me to gain first-hand knowledge of what physicians were looking for specifically. Pediatricians might be looking for one type of situation as opposed to an orthopedic practice.

SFHN – Is there a trend in mixed-use commercial developments that involve a health care element?

FA – I feel that has always been the tendency. It is the connection between the demand and the supply. The population growth always precedes the need of health care services. By planning ahead, you hope to achieve a perfect balance. The tendency is to build communities where you can live, shop, work and have all services available to the residents within the same area.

CM – I seem to be seeing some additional medical office spaces away from hospital campuses. For a while, it seemed they wanted to pull people onto a hospital campus so it was one-stop-shopping for everything. But now hospital campuses are becoming so dense that there seems to be a need to get those services that aren't critical away from the hospital campus and relieve some of the congestion that typically occurs around urban-area hospitals. And I know (they) open up clinics in order to treat people to keep them from having to use Emergency Rooms for non-emergency visits just because there are no other outlets where they can get treatment.

BR – There are several examples where a mixed-use commercial development involving a health care element is present. Some of the new hospital and/or health care system campuses are utilizing mixed-use development concepts to create a one-stop-shopping environment. The revitalization of many of the large urban and university hospital settings have incorporated mixed-use commercial development concepts.

KW – Yes, in fact we're doing many as we speak. The health care element provides services in mixed-use projects for both residential and commercial components within a development, along with others within that area. And it's almost a natural. If you have a residential condo and you have the capabilities of putting a medical facility on the bottom floor—we have many health care providers who are looking for those types of projects. But it should still be in a location that can service other segments of the population, not just the people directly in that particular development.

SFHN – What are some of the changes and challenges facing the industry in the coming years?

FA – I definitely see continued growth for the office condominium buildings. One of the things that is propelling these medical office buildings and commercial buildings in general is the return of the housing industry to normality. The investors still have the recent experience of the stock market in their minds, and they're afraid to go back and invest in the stock market. Office buildings—commercial properties—offer them an opportunity to invest in real estate, which has been one of the most profitable investments.

CM – One of the interesting challenges we're running into while working on existing hospital campuses is that the land area is limited by virtue of the urbanization around it. As areas get renovated and buildings expand, there's no easy way to expand outward any more. So we have to be more creative in how we incorporate changes into very limited spaces. Sometimes it's building on top of existing space, or gutting existing areas to provide more efficiency, or reinforcing structures of existing buildings so they're able to support the weight of new medical equipment. A hospital has to be in operation 24/7. When you do a project, you don't have the ability to shut down a wing or say we're going to demolish a piece of the building and rebuild it. We have to keep what's there in operation and figure out a way around it, with the least impact to the hospital and the patients in it. That's one of the most interesting challenges I see as an architect.

BR – The rising cost of construction has been a major challenge for all developers.

KW – I think physicians will continue to avail themselves of the opportunity to own as oppose to lease. It doesn't work for everybody, but in certain instances we're dealing with health care professionals who heretofore were only interested in leasing space because they didn't have a working knowledge of owning their own space. Another (change) is the location of health care facilities directly in the path of the work force and the residential areas—the increased traffic costs, fuel costs, and the time-loss factor involved in traveling in and around expressways and over-crowded roads to get to one's physician for health care procedures. There are people who are actually talking about putting medical offices in Wal-Marts and Publix grocery stores. So you really have to work on staying ahead of these trends. You don't want to be the second or third person in line; our goal is to stay ahead of them.

SFHN – Do you experience more "red tape" when dealing with hospital boards and/or health care decision-makers than you would in other industries?

FA – Yes, that is definitely the case. Normally the people at the executive level in hospitals are employees who respond to the Board of Directors, and the Board of Directors responds to benefactors and stockholders, and in a way they have their hands tied. So it's a very bureaucratic decision-making process, and that makes it very difficult. However, I must say that in the particular case we have in Homestead, next to Baptist Hospital, it has been quite an exception. We have dealt directly with the CEO of the Hospital, Bo Boulenger, and he has responded to us in a very efficient manner, and has cooperated for both of our benefits.

CM – From the construction point of view, I think the medical projects seem to run very efficiently because there needs to be a very definitive beginning, middle and end of a project. It can't go on forever inside a hospital because of how critical the needs are and the impact upon the other infrastructure. So you have some very talented people to work on hospital projects because of the complexity of it. Some of the projects that are off a hospital campus are a little less complex in nature.

BR - Even within the health care industry, there are differences in the decision-making process. The investor-owned health systems typically are structured so one or two individuals are involved in the decision to build a new facility, whereas in the not-for-profit health systems, generally a board committee and/or full board may be required to approve the project. This tends to make the decision-making process a little longer.

KW – What you have with hospitals is "decision-by-committee," and you get into situations where you "hurry-up-and-wait." But now you're seeing situations where hospitals are selling medical office buildings on campuses and using the proceeds to better or increase the services of the hospital. So where we might have represented a hospital and a medical office building on campus, at this point we're either land-leasing the building from the hospital or we actually have control of the land and we'll build it ourselves. This has a tendency to speed things along. As a result, we're not as involved with the slowdown or the red tape as we were earlier in our career.

In addition, all four men agree that the spate of hurricanes the past couple of years has had an impact on the health care real estate industry, not only with an increase in insurance rates, but also with new hurricane codes that include such items as hurricane-resistant glass and electrical generators in new and renovated buildings.

Fortunately, the knowledge and expertise of these leaders will allow them to navigate through hurricanes and other challenges that lie ahead. It would appear that the health care real estate industry in South Florida is in good hands.

For more information, please call or visit The Abbo Group of Companies at (954) 392-8788 or www.primehomebuilders.com; Saltz Michelson Architects at (954) 266-2704 or www.saltzmichelson.com; Kenneth Weston & Associates, Inc. at (305) 279-2700 or www.kennethwestonassoc.com; or Rendina Companies at (561) 630-5055 or www.rendinaco.com.
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