Why development of medical office buildings is booming

Why development of medical office buildings is booming

Article Originally Posted by AZBigMedia on November 15, 2022

Maricopa County, the state’s largest by population and home to the capital, has long been a destination for those looking to escape frigid winters in search of sunnier climes. An increase in the number of residents drives higher demand for healthcare services, and one of the popular options to address these needs are medical office buildings (MOBs). Phoenix has the eighth-largest MOB market in the U.S. totaling 21.4 million square feet, according to 42Floors.

“Phoenix is growing fast but also aging, which both affect healthcare significantly,” explains Mike Brinkley, healthcare advisor at Land Advisors Organization. “I know of five new hospitals being planned, and this is following the last few years where most of the systems have announced new bed towers on their existing campuses. So, we have two kinds of growth happening — hospitals and all other kinds of outpatient care. Where else in America does that happen? It’s very unusual.”

The U.S. Census Bureau reports from July 1, 2020, to July 1, 2021, more than 58,000 people moved to the nation’s fourth most populous county, continuing Maricopa’s long streak of inbound migration. As the Valley continues to expand, its hub-and-spoke model of healthcare is following suit to ensure residents have access to all levels of care.

“Technology has improved — we’re seeing [operations such as] hip replacements done on an outpatient basis. That wasn’t true 10 years ago, and there are many other services like that,” Brinkley continues. “There’s efficiency in the system — keep the expensive care in a hospital where you can get the economy of scale and push everything else out to where people live.”

Medical office buildings

One of the major benefits of medical office buildings is how convenient they are for patients. While tenants vary, Perry Gabuzzi, senior vice president with Kidder Mathews, says it is helpful for MOBs to have a primary care group within the building as a referral source to other specialists in the same building, along with other high-demand services such as labs and imaging.

Not all medical office buildings, however, are the same. For example, the new Phoenix Children’s Hospital — Arrowhead Campus, will include a 45,000-square-foot MOB onsite to house orthopedics, neurology, cardiology, oncology and other specialty services. Being a tenant in such a location comes with the benefit of proximity to patients in need of care, but also has disadvantages.

“The hospital ends up being a draw [for patients], but when you lease an on-campus medical office building, you’re dealing with a whole different set of criteria than if you are off campus,” Gabuzzi explains. “Those criteria are ground lease restrictions, exclusive uses and/or hospital staff privilege requirements.”

Adds Andrea Davis, owner-designated broker at Davis Commercial AZ, “If a doctor is not affiliated with the hospital, they cannot be in one of their medical buildings on campus. There’s a growing group of doctors saying, ‘I don’t want to be affiliated with [a particular hospital]; I want some autonomy and the ability to make the choices that are best for the patient or their insurance.’”

The COVID-19 pandemic spurred smaller medical practices to combine, adding to an existing trend of consolidation. The American Medical Association reports that 50.2% of all patient care physicians were employed in 2020, up from 47.4% in 2018 and 41.8% in 2012.

“Being larger gives them better leverage to negotiate deals, but it’s also getting harder for medical providers to make a living unless they are specialists,” explains Melynn Wakeman, founder of Wakeman Integrity. Her career started in medicine, spending 17 years in the field before transitioning to commercial real estate.

“Five years ago, $165 per square foot was a typical asking price for a medical office,” she continues. “Now that’s up to $360 per square foot. But overall, if there’s a medical office for sale it’s gone immediately.”