Globest.com: Healthcare Changes = Larger, Longer Leases

By Carrie Rossenfeld | Orange County

Johnson: “Three years ago, our average lease was one to three years; for the last two years we’ve been giving five-year leases and, more recently seven- to 10-year leases.”

RANCHO SANTA MARGARITA, CA—Smart doctors are figuring out how to maximize their office space and partner with other practices to get the most bang for their healthcare real estate buck, Cypress West Partners’ partner Jeff Johnson tells GlobeSt.com. After the firm was chosen by Orlando based CNL Healthcare Properties to manage a three-building medical-office campus totaling approximately 140,000 square feet in Henderson, NV, we spoke exclusively with Johnson about new trends he’s noticing in the healthcare real estate sector and the challenges and opportunities in managing those assets.

GlobeSt.com: What new trends do you see emerging in the healthcare real estate sector, particularly with MOBs?

Johnson: We’re seeing larger space requirements and longer-term leases. Three years ago, our average lease was one to three years; for the last two years we’ve been giving five-year leases and, more recently seven- to 10-year leases. So, things are changing in that respect. There’s been more efficient use of space by the doctors, who have figured out how to work in this environment. They’re taking offices out and putting in more exam rooms. Instead of 1,500-square-foot to 2,500-square-foot spaces, they’re renting 3,000-square-foot to 4,000-square-foot spaces. Doctors are getting together to create larger practices, and hospitals are combining practices as well.

GlobeSt.com: What are the greatest challenges to managing MOB assets in an ever-changing healthcare real estate landscape?

Johnson: Since we’re leasing larger spaces, we’re reconfiguring and combining more spaces, and TI costs are higher than what we’re used to seeing. Also, from a management perspective, it’s a challenge trying to hold down costs for common-area maintenance of the building with rising electricity and water costs—we’re constantly battling that.

GlobeSt.com: Where do the greatest opportunities lie in managing these assets?

Johnson: We’ve really honed in on looking at our HVAC systems and energy-management systems and are becoming better operators of those systems. For example, we just replaced an HVAC system in San Diego that was an old DX system that uses coolant to a chilled-water system that’s highly efficient and saved 34% on kilowatt usage. Unfortunately, that has translated to only 18% savings in the cost of electricity because prices have gone up.

GlobeSt.com: What else should our readers know about this sector?

Johnson: It’s a dynamic and evolving sector. We are seeing sparks of life and maybe even have the pilot light lit.