Medical, health buildings bright spot in commercial real estate market

Mercy Medical Center is converting a former Giant grocery store in Lutherville into a hub where patients can go for lab work, minor surgeries and to visit primary care physicians.

Urgent care centers such as Patient First and Doctors Express are taking over retail spaces in high-traffic areas, including where a Roy Rogers fast-food restaurant was once located.

And Thomson Reuters this summer opened its first branch dedicated to health care research in Woodlawn office space, where more than two dozen employees will provide data and analysis to the federal government.

While the commercial real estate market as a whole experiences some of the highest vacancy rates in years and struggles to rebound, developers and brokers are seeing a bright spot in the demand for buildings that can house medical offices. The health care field is taking advantage of leasing deals and in some instances locating to desirable spaces that might not be available in boom times.

Some medical offices are expanding as national health care reform has the potential to prod growth in the industry. Thousands of new patients are expected to be added to the insurance rolls over the next four years.

"The general retail and office sectors have been beaten up pretty well," said Curtis H. Campbell, executive vice president of commercial real estate firm Wallace H. Campbell & Co. Inc. "The medical side is extremely stable and a potential growth area."

The Baltimore-based real estate firm has been able to weather the financial downturn because of its medical office and health care practice. The firm's medical properties are 90 percent to 100 percent leased, particularly ones located closest to hospitals, Campbell said.

The firm also is seeing some interest in health-related companies wanting to move to general office space. It recently brokered the deal for Bravo Health Inc., the Baltimore insurance company, to move into a 13,000-square-foot space at the Parren J. Mitchell Business Center near downtown Baltimore on Martin Luther King Bourlevard.

Bravo Health, which agreed last month to be acquired by Tennessee-based HealthSpring Inc. for $545 million, signed a lease to open an advanced care center in the office building to provide nonemergency care. It said it plans to open more centers in the area in the near future.

The medical office vacancy rate for the Baltimore region was 10 percent in the second quarter, compared to nearly 12 percent in the general commercial sector, according to Cushman & Wakefield.

Medical office tenants are historically more stable because the health care industry is somewhat recession-proof — people get sick and need doctors no matter the state of the economy. The industry also has grown with the aging of the population.

Health care spending represented about 17 percent of GDP in 2009 and is expected to reach 21 percent by 2019, according to the Office of the Actuary, Center for Medicare and Medicaid Services. Many believe health care will continue to outpace growth of the overall economy,

Doctors like to stay in one place so patients can easily locate them and because the build-out costs of a new medical office are pricey — making them highly sought-after tenants by brokers and developers.

Hospitals also are changing business models to meet the needs of patients, who want more convenient care. City-based hospitals are expanding their reach with satellite offices in the suburbs, while urgent care centers are catering to the needs of a busy public that wants quick access to health care.

Mercy Medical Center in downtown Baltimore is turning the produce and meat aisles of the former Giant into medical offices that will house 15 primary physicians. The center is part of a plan by Mercy to open several hubs across the region and is being promoted as one-stop shopping for patients.

"The trend is that folks don't want to go downtown for much of anything," said George Lowe, Mercy's vice president of primary care and the medical director of the new Lutherville hub. "Mercy's vision is to have a window to the communities outside of downtown and provide health care to those communities."

More than $2 billion in expansion projects at the main campuses of area hospitals also is driving development near those facilities. Johns Hopkins Medicine, Mercy Medical Center and the University of Maryland Medical Center are among the hospitals replacing old buildings or adding emergency rooms, operating suites or other facilities.

Office projects and mixed-use buildings have sprouted up around many of these hospitals.

In some instances, hospitals are partnering with developers who own and build offices that hospitals then lease. LifeBridge Health, for instance, is leasing the Northwest Hospital Professional Center it runs on the grounds of Northwest Hospital in Owings Mills.

But medical tenants aren't just moving into spaces traditionally occupied by health care tenants.

"We're seeing creative use of real estate and conversions of space," said Richard Taylor, managing director of health care solutions at Jones Lang LaSalle.

Urgent care centers in particular are seeking retail sites in high-traffic areas with ample parking and good visibility. These centers are making their homes in old fast-food restaurants or in shopping centers that would have housed boutiques in better economic times.

"They want to be upfront and visible in either a free-standing building or close to the road," said Patrick A. M. Miller, a retail specialist and partner at KLNB retail who represents Patient First, which opened a site on a parcel of land on U.S. 40 that once housed a Roy Rogers.

Health care reform's potential impact on the medical real estate market is still unclear. Reform will add 30 million people to the rolls of the insured by 2014, so it seems that more doctors and therefore medical space will be needed to handle the crush. The highest estimates predict that 60 million square feet of medical space will eventually be needed.

But many in the industry say that number is too high. They note that there may not be enough doctors to handle that many patients, as there is already a shortage of primary care physicians.

Cushman & Wakefield also noted that provisions of health care reform that reduce government reimbursements to doctors could put pressure on medical practice profits and impact growth in the sector.

"There is a lot of data out there," said Gary Hopper, managing principal of the Cushman & Wakefield Healthcare Practice Group. "There is also the reality of what is going to support it, and nobody knows that yet."


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