GlobeSt.com: With so much uncertainty in the healthcare market at the moment, how do you see this impacting leasing and investment in Orange County and other parts of the West Coast?
Borzouei: There’s certainly a flight to quality, whether in purchase or larger leases. Most people involved in transactions are willing to make bets on the “best-in-class” hospitals and doctors.
Immel: Overall, we view the current healthcare debate between Obamacare and Trumpcare as an opportunity for people who wanted to push decisions to do so. There continues to be a tremendous amount of interest from tenants to renew, expand or create new business models. With the Affordable Care Act in full swing, there are more people insured, and those people need services. We are seeing the strongest activity in markets such as Newport Beach, CA; Santa Monica, CA; Scottsdale, AZ; and Henderson, NV. In addition, many services providers are actively expanding into secondary and tertiary markets, which we haven’t seen in a while.
GlobeSt.com: What are the major challenges to healthcare leasing in this region?
Borzouei: Larger space with longer terms means higher costs in TIs. If you are a well-heeled owner and operator like CWP, it may work to our advantage in a competitive situation. You just have to be ready to pony-up.
Immel: Some of the challenges to healthcare leasing in higher-demand areas are increasing rents and the lack of good, quality space. Rents continue to increase, which presents a challenge to doctors facing reimbursement cuts and the high costs to deliver medicine today. With the best markets having low inventory, space is limited and new development is minimal, giving landlords a stronger negotiating position. One of the major challenges landlords are facing in today’s market are the tenant-improvement costs. Tenants are looking to landlords to pay for a majority of those costs, and in return, tenants are committing to longer leases. It takes a team approach to meet the objectives of all involved.
GlobeSt.com: What challenges exist with healthcare investment here?
Borzouei: Patient demand will be increasing over the next 20 years, and real estate will have to respond quicker than we have in the past. Like we say around here, sometimes it is like driving an aircraft carrier up a stream.
Immel: The barriers to entry are a challenge since the demand for medical-office investors to be in Orange County is high, but there is very little product to buy. Buildings that are trading in Orange County are in high demand, and cap rates continue to remain low for well located, good-occupancy product.
GlobeSt.com: What else should our readers know about healthcare leasing and investment?
Borzouei: Healthcare investment is a competitive landscape, and we see it becoming more institutionalized. As an owner and operator, we have to be ready for the one square-foot-at-a-time battles, while keeping our eye on the bigger picture. Healthcare is a full-contact sport.
Immel: In both the best markets and some of the outliers, opportunity for space is very competitive with rents on the rise and vacancy continuing to decrease with little new product coming online in the near future. If you are currently in the market for space, and you find something, you better jump on it. Landlords have to work to provide the best environment for physician tenants and patients, and tenants need to be in a position to succeed for five, 10, 20 years. When the cohesion between landlords and tenants is working, medical leasing as well as overall building investment have great outcomes.