MOB Projects That Are Signing 25-Year-Plus Leases
RANCHO SANTA MARGARITA, CA—Medical-office buildings that house upper-level, outpatient modalities and services are growing much bigger and the lease terms are getting even longer, thanks to recent healthcare changes. Two experts weigh in on the trend EXCLUSIVELY with GlobeSt.com.
RANCHO SANTA MARGARITA, CA—GlobeSt.com recently spoke with Jeff Johnson, a partner with Cypress West Partners, about trends in the healthcare real estate space. One of the points Johnson made was that healthcare leases were becoming both longer term and larger in square footage because of Obamacare.
In response to that story, Christopher Bowen, VP of Irgens, a real estate developer in Milwaukee, told us this has been the case for some time. “In my experience, the average medical-office lease is seven years, and the landlord preference is 10 years—primarily due to the fact that the tenant-improvement allowance in class-A medical-office buildings is approximately two to three times that of other commercial-tenant space. This is nothing new—it’s been this way nationally for at least the past 25 years that I’m aware of.”
What has been a relatively new trend over the past five to seven years, however, says Bowen, is that not only are healthcare real estate leases growing in square footage and length of term, but medical-office buildings that house upper-level, outpatient modalities and services are growing much bigger and the lease terms are getting even longer, thanks to recent healthcare changes. Bowen says the average lease term for such projects is moving from 10 to 15 years up to 15 to 25 years, and the trend is accelerating. “One of the factors is that smaller, one-to-four-physician practice spaces are making way in these new projects for much larger, 10-to-100 physician medical-group practice facility spaces. These large group-practice facilities are being combined with comprehensive outpatient diagnostic and surgical centers.”
Bowen adds that rather than having 50 to100 leases for a typical class-A medical-office building, “We’re now seeing one to three leases from credit-tenant providers in projects that are two to four times larger than their counterparts from 10 years ago.”
Johnson replies, “In our portfolio, we have tenants that resemble this trend. I can confirm that we have acquired a few MOBs that fit into this category. Most of them are ‘purpose-built’ development deals that we acquired from the original developer.”
As an example, within Cypress West’s portfolio is a 100,000-square-foot single-tenant acquisition with more than 130 physicians practicing within the group. “The result is a one-stop shop for patients on a grand scale,” says Johnson. “I think you will see this trend continue on a limited basis in certain markets as providers extend their reach to grab more market share.”
Johnson adds that in certain markets, the providers have been aggressive in acquiring practices. “However, we have seen this slow down recently, which may be a result of fewer practices available. In addition, providers are pushing further and further out from their ‘hub,’ positioning key outpatient services closer to their patients.”
Johnson says his firm seems to be getting larger and longer leases along with increased credit-worthiness. So, the healthcare real estate market appears to be quite healthy itself. “Patient volumes are up. We recently talked with a service provider that estimated their patient traffic is up 54% year over year, with profits increased 18% as a result.”