Savvy marketing is a must for MOBs

CLOSING ON A MEDICAL OFFICE DEVELOPMENT DEAL MEANS THE WORK HAS JUST BEGUN

 

Editor’s Note: This is the third in a series of articles reporting on the recent “Medical Office Building (MOB) and Healthcare Facilities Seminar” held in Dallas. Healthcare Real Estate Insights^™ was on hand to cover the conference, which was presented by BOMA International. This article presents highlights from a panel discussion titled “Creative Marketing Strategies.”

 

By Murray W. Wolf

 

When a request for proposals (RFP) for a new medical office building (MOB) lands on the desk of a healthcare real estate development firm, it can trigger days – or even weeks – of pressure-packed, labor-intensive effort.

The marketing and new business development staff will undoubtedly toil long hours to craft an RFP response that will persuade executives of the sponsoring hospital to put the firm on the “short list” of finalists for the project. If all the work pays off and the firm is selected, it is cause for rejoicing all around.

But while responding to RFPs can be a huge amount of work and, subsequently, winning the business is undoubtedly a gratifying moment, healthcare real estate veterans say that’s just beginning. Now the real work begins.

What kind of work? Marketing – or, more specifically, leasing the space in the planned MOB.

During the recent BOMA MOB conference, a panel of industry experts tackled the topic of MOB leasing in a panel discussion titled “Creative Marketing Strategies.”

The panel consisted of:

• § James “Jim” Galgano, president of DASCO Cos. in Palm Beach Gardens, Fla.

 

• § Thomas “Tommy” Tift III, president and CEO of HealthAmerica Realty Group in Atlanta.

 

• § Cindy Alloway, vice president and chief operating officer for Alegent Lakeside Hospital in Omaha, Neb.

 

The moderator was Galen Johnson, principal and senior vice president for Trammell Crow Healthcare Services (TCHS) in Dallas.

Understand relationships

The MOB marketing and leasing effort is “really where the rubber meets the road,” Mr. Johnson told the audience during his introduction.

“Sometimes it’s easy to get the appointments, run through your material, have a decision made and then, all of a sudden, the work starts,” he said.

The first presenter, Mr. Galgano of DASCO Cos., offered his take on how to tackle that challenge.

“There probably aren’t any great secrets out there; there are only processes that you can follow,” he said.

Mr. Galgano said that almost all of DASCO’s project are on-campus and involve hospital partners. Thus, from his perspective, successful marketing largely hinges on the hospital-developer relationship.

There are several reasons why a hospital might want to partner with a developer, Mr. Galgano said. One reason is that developers can be a source of capital. Also, real estate isn’t a hospital’s core business. In addition, hospitals sometimes want someone else to be the landlord to their doctors.

“But it’s really important for you to understand what their motivation is,” he said. “One of the things you also have to understand is how that’s going to impact your leasing strategy.”

“A hospital is entrusting us with one of their greatest assets, and that’s the intro to their physicians,” Mr. Galgano continued. As a result, the selection process is “very important to them” and impacts their leasing strategy. The developer needs to understand the hospital’s goals for the MOB so it can make sure that its leasing strategies are in alignment.

“It is true partnership from our perspective,” he said.

Since hospitals typically aren’t willing to sell part of their campus, developers of on-campus MOBs usually need to negotiate a ground lease in which the developer and some investors will own the MOB while the hospital retains ownership of the land underneath, Mr. Galgano said.

“The ground lease is really, in most instances, the controlling document,” he said. “And within the controlling document, you’re going to find a lot of what we refer to as the ‘hospital control features.’” Such features can include controls over the tenant mix, the permitted services and the right to refuse the sale of the building to any potential buyer.

“You’re going to find that you need to have that information because it will impact your meetings and your recruiting of physicians,” he said.

Formulate a plan

A specific marketing plan must be developed for each project, Mr. Galgano said.

Good communication between the hospital and developer is vital, he said. To get the hospital to “buy-in,” he said, it’s also important to make sure administrators are involved in all aspects of the development process and that decisions aren’t being made at the system level with no local participation.

If the developer doesn’t have an opportunity to work directly with the hospital CEO or administrator, Mr. Galgano said the firm should make sure it keeps the top executives informed.

“Don’t rely on hospital folks to keep their bosses informed,” he cautioned. “Make sure that you’re taking care of that as well.” Developers need to avoid letting the top executives be surprised because their reaction to those surprises could negatively impact the project.

Another key to an effective MOB marketing effort is to understanding the hospital-physician relationship, Mr. Galgano said

“You can really get blindsided if you don’t make sure that you understand the relationships that exist between the hospital and their staff. We try to get the physician leadership involved from the very beginning,” he said.

For example, if an MOB proposal has been batted about for years with no action, prospective physician-tenants might be justifiably skeptical – which makes the leasing task more difficult.

On the other hand, Mr. Galgano says DASCO has had situations in which it announced a project to the medical staff of a hospital and had the chief of staff immediately sign a letter or intent — as well as deposit a check on the spot.

“That’s getting leadership buy-in,” he said. “You’re not always going to get that. But you want to make sure that you understand where they are coming from. Other physicians will look to see what they (administrators) are going to do.”

You’ll also want to know what services the hospital is thinking about providing in the MOB and whether the physicians have been involved in those decisions.

“One of the things that we’ve seen is that there has been a real increase in hospital-physician joint ventures over the last couple of years,” Mr. Galgano noted. “As a developer, we were always pushing for those joint ventures because clearly they help attract physicians to medical office buildings.

“What we’re now seeing is that there is a real increase in that, in particular, in terms of outpatient surgery and the like. But you want to make sure that you understand what opportunities you have to sell besides simply the real estate.”

Developers also need to make sure they anticipate potential conflicts between hospital and physicians over issues such as quality of care, Mr. Galgano added. Most physicians believe they could run the hospital better than the hospital’s administrators, he said, and they don’t always agree with the hospital’s goals and objectives.

The leasing team also needs to be sensitive to the concerns of physicians that have relationships with more than one hospital, he said. They might be uncomfortable about outwardly displaying a commitment to one hospital over another.

Size up the competition

“You can’t develop a marketing plan unless you understand what the competition is,” Mr. Galgano added. A leasing team typically faces competition from other MOBs on the same campus, MOBs on other hospital campuses, and off-campus MOBs developed and owned by physician groups or third parties.

Hospitals are especially sensitive to competition from other hospitals, according to Mr. Galgano. In fact, he noted that almost all ground leases require a real estate firm to market an MOB only to physicians on the hospital’s staff – unless approved by the hospital. That certainly limits the universe of prospective tenants for the leasing team.

Then again, hospitals might be willing to target physicians from other hospitals if they are trying to get them to jump ship. Mr. Galgano said it’s not uncommon for CEOs of competing hospitals to walk through MOBs of their rivals, knocking on doors and trying to convince physicians to make a change.

Physician groups developing their own MOBs can also be competitors, Mr. Galgano said.

“In today’s environment, (physicians) are looking for ways to make additional revenue and they have come believe that there are opportunities in real estate… and actually there are,” he said. “And it’s going to be up to us to make sure that we are directing them to the most logical approach for their practices.”

The leasing team also needs to be sensitive to potential competition right on the same campus, such as what types of services are being offered on campus or even within the same MOB.

 “More often than not, we have found that if physicians are being reasonable about what they are trying to accomplish, the hospitals will be reasonable as well.” For example, a physician group wanting to install an imaging center that would compete with the hospital’s imaging services faces an uphill, if not insurmountable, battle.

Knowing the competition is certainly one way for the real estate team to establish competitive lease rates, Mr. Galgano said.

“Our rent is always too high — all you have to do is ask a potential tenant,” he said with a smile. But he said it is important that prospective tenants recognize the true cost of medical office space and understand why certain buildings might have higher rates than others. For example, an MOB with higher lease rates might offer more of an allowance for tenant improvements (TIs).

It is also important to know if there is demand for physician ownership. Two basic methods used for structuring physician ownership include: free equity, where a physician is given an ownership stake for committing to a long-term lease; and pari passu, in which physicians invest a certain amount and receive a stake in a project, independent of any leases they might sign.

It is also important for all parties to understand the costs of construction.

“Our experience is historically and almost consistently that a developer-developed building is going to be more expensive than a hospital-developed building in terms of what the rental rates are.” Mr. Galagno said. Part of the reason is that developers need to make a profit on an MOB while a hospital, which has other goals for its real estate, does not always need to do so.

Mr.  stressed the need to work collaboratively with the hospital in developing a marketing plan. He noted the importance of having good marketing materials – such as brochures and sell sheets – that include “the pretty pictures.” He also noted that the brochures should include all of the pertinent information in a concise format.

When it comes to leasing MOB space to physicians, Mr. Galgano stressed the need for patience. It is unlikely that a prospective tenant will make a snap decision about renting space on the basis of a brochure or a first meeting, he said.

“There will be skepticism. You are a developer. Hopefully you kept the big fat gold chains under the shirt and nobody’s seen those,” he said jokingly.

“But the reality is, you are not the hospital. They don’t have the leverage that they think they have over the hospital when they’re dealing with you, and it makes them a little uneasy.”

He added: “The reality is that we are a necessary evil for them.” The real estate is not the doctors’ primary interest, he said, noting that it is simply something they must deal with in order to do their jobs. The leasing team should emphasize benefits other than the real estate, he advised.

Noting that the ownership and management of an on-campus MOB requires a long-term relationship, Mr. Galgano said: “We focus a lot on gaining their trust.”

Don’t play favorites

“Doctors talk,” Mr. Galgano noted, which means that they will share information about the terms of their leases. As a result, it is important for a real estate firm to be consistent with its tenants. If the leasing team makes a concession for one physician-tenant, the other physicians will find out about it and will typically want the same terms.

However, he said it’s not unreasonable for a large tenant to receive concessions not offered to smaller tenants. But leasing teams need try to treat similar-sized tenants equally, he urged.

Maintaining a dialogue with the hospital and the physicians is important, Mr. Galgano said. He said DASCO provides the hospitals with a written report on the status of its leasing efforts every couple of weeks.

“One of the things that we want to make sure that we’re doing is that we’re listening to what they’re (the physicians are) telling us,” he said.

“Make sure that you’re focusing on the benefits to their practice,” he added.

Give the docs the docs

It is important that physician-tenants receive and understand all pertinent documents, Mr. Galgano said. Those documents often start with a letter of intent.

Speaking of which, he said most doctors often say they’re “interested” in a new MOB. But, “when you ask them to sign a letter of intent and give you a deposit check, then you know how interested they are.”

He noted that in many cases, physicians with space in hospital-owned MOBs signed leases with two or three pages. DASCO’s lease agreement, on the other hand, is much longer and more detailed – another change for the doctors to get used to.

Even though physician-tenants aren’t party to the ground lease between the real estate company and the hospital, Mr. Galgano said that such documents often include specific restrictions on the mix of services that can be offered in the MOB. For example, certain procedures might be prohibited by Catholic hospitals. To be fair to tenants, he said it is important to communicate those restrictions to prospective tenants.

If there is physician ownership involved in an MOB, the physician-investors also need a copy of the associated documents. DASCO usually uses a private placement memorandum, he said.

In wrapping up his presentation, Mr. Galgano noted: “The real benefit to this business is also one of the real challenges for those of us in the leasing area: Physicians don’t like to move. So once you get them in your building, you have a real good shot at keeping them there.

“The problem is, most of them are in buildings now. So that same concept holds true for getting them out of where they are to where you want them to be.”

Physician-tenants need to understand that you and the hospital have a vested interest in their success, he said, and you will be there for the long-term.

Know your market

Mr. Tift of HealthAmerica used humor to communicate the positive outlook for the healthcare real estate business.

“At age 3, we’re worried about not wetting our pants. At age 12, we’re worried about having friends. At age 24, we’re worried about having sex. At age 35, we’re worried about having money,” he said, eliciting growing laughter from the audience.

“At age 60, we’re worried about having sex. At age 75, we’re worried about having friends. At age 80 we’re worried about wetting our pants.”

In other words, Mr. Tift said, the aging of the U.S. population assures that there will be plenty of demand for medical office space for many years to come.

When leasing space in MOBs, he said, it’s important to understand the healthcare industry.

“We’re as much healthcare experts as much as we are real estate experts,” he said.

There is limited market data available regarding MOBs, Mr. Tift said.

“You’re not going to be able to go to a service like CoStar and look up what the vacancy and occupancy of a particular building is,” he noted, referring to a well-known commercial real estate information services firm. Those services don’t effectively track medical office space.

Yet, the leasing team still needs to know the market. So how does the team do that?

First, Mr. Tift said, “You need to get medical real estate people involved in your building. You don’t go hire an industrial real estate guy to go lease an office building. The same holds true for medical office.”

Then, those medical real estate professionals need to talk with key people within the market, including physicians, other building owners, physician recruiters, other brokers, hospital executives, current tenants and others. Brokers need to visit and walk through all of the MOBs in their market, he added.

“You’re probably going to have to go in there and eyeball the building to get a feel for what that occupancy is, and also get that from talking to the building owners,” he said.

You need to catalog this information and continually update it, he said.

Know your product

The leasing team also needs to know what advantages its building might have over the competition, Mr. Tift said.

He said it is important review all the existing leases in the building, looking closely for exclusives, expansion options and rights of first refusal – anything that could affect the leasing effort. For example, a leasing team does not want to be ready to do a lease and then find out that an existing tenant has a right of first refusal, he said.

HealthAmerica also conducts a tenant-mix analysis in order to identify synergies between tenants, he said.

It’s also important to talk with the current physician-tenants, according to Mr. Tift.

“Doctors will definitely tell you the bad about the building,” he said. “You need to find what’s good and bad from the doctors’ perspectives to aid you in the leasing process.

“This sounds kind of basic, but you want to get your sign up,” Mr. Tift continued. He said he has often found that leasing signs are missing or hard to find.

Brokers also need to be flexible with prospective tenants, such as being prepared to meet with doctors early in the morning, after hours or on weekends – that’s when doctors are not seeing patients, he said.

You also have to be “hospitable,” Mr. Tift said in his Southern drawl.

“In the South, we have a definition of hospitable – ‘making someone feel at home when you wish that’s where they were,’” he said, again drawing laughter from the audience. “Sometimes you feel that way about the physicians.”

In addition, brokers need to make sure their rental rates and lease terms are competitive within the market, he advised.

“We’re not magicians. We can get the market for that building. If it’s $21 (per square foot), we can get $21. But we can’t get $25,” he said.

Identify prospects

After brokers have done their homework regarding a market and the competition, Mr. Tift said, it’s time to identify specific physician group as prospects.

There are many ways to find prospects, he said. Sources can include hospitals, health insurance plan books of participating physicians, Web sites – even the Yellow Pages.

The HealthAmerica leasing team will physically “cold call” physicians in every building in the market to gather prospective names. Physicians usually have business cards available at the reception desk, he noted. Often, they will also have business cards for practice managers. Nine times out of 10, brokers won’t get to see a prospective tenant, he said, but at least they can get the contact information.

The leasing team inputs the prospect information into a contact management system that is shared by all of the brokers. A record is created for each prospect that includes background information and a complete history of all contacts with that prospect.

In terms of which prospects to target, Mr. Tift said the leasing team should review the tenant mix analysis to identify potential tenants to be added.

Speaking of tenant mix, Mr. Tift said: “If your building has a parking deck, that can be a huge money generator for you” – if the MOB has the right tenant mix. MOBs with dermatologists, allergists, breast centers and physical therapists can profit significantly from parking because there is so much traffic in and out, he said.

Another way to maximize revenue is to charge higher rents for certain areas of a building, such as a courtyard, he said.

Start cold calling

With the prospect list in hand, Mr. Tift said, his firm kicks off the marketing campaign with a direct mail effort, followed by “a methodical cold-calling program.” He said the firm sends out flyers every week.

“We will then follow up with a phone call. Then we will consistently call that doctor,” he said.

“Again, nine times out of 10 he’s not going to call you back after the first phone call. So you’re going to have to keep calling and keep calling. And you don’t want to call like four and five times a day. You want to call maybe every other day, give them a couple of days. But keep it persistent until you get the guy on the phone. We’re dialing for dollars.”

He said the leasing team should allocate a specific amount of time each day for phone calls.

The leasing team should also strive to expand its network of contacts, Mr. Tift said, because that can be a great source of referrals. Get to know healthcare practice consultants, drug and medical supply sales representatives, medical interior space planners and architects, and others, he advised. Those contacts are often the first to find out if a physicians group plans to move or expand.

Cultivate relationships with physician recruiters, too.

“I cannot tell you how important it is to be close to these people,” Mr. Tift said. They have direct knowledge of physicians that are looking to move.

He also advised being active in medical- and real estate-related organizations, such as the Medical Group Management Association (MGMA), Building Owners and Managers Association (BOMA), state hospital associations and others.

He said it’s also important for real estate firm to list its available space on its Web site and in local publications such as Black’s and Dorey’s.

More tenant reps

“We’re seeing more and more real estate brokers – commercial brokers – tenant-repping large physician group practices,” Mr. Tift said, especially larger physician groups. “When you are dealing with 30 or 40,000 square feet, the commercial guys get interested.”

About 20 percent to 30 percent of HealthAmerica’s deals are done through cooperating brokers. So it pays to have good rapport with the brokerage community, Mr. Tift noted.

Like Mr. Galgano of DASCO, Mr. Tift emphasized the need to be consistent regarding lease terms for similar-sized tenants.

“Forty-eight hours after a doctor signs a lease, every doctor in the building knows the deal that was cut,” he said.

But – again like Mr. Galgano – Mr. Tift said there’s nothing wrong with providing some additional perks for large tenants.

For example, he said real estate firms might want to consider giving exterior signage rights to large practices. However, he warned, “If you do that for one doctor, everybody in the building is going to want it.” Make sure to reserve signage rights for large tenants, he said, or there might be so many names on the sign that it becomes difficult to read.

Likewise, he said, leasing teams need to be cautious about offering exclusives or rights of first refusal.

To conclude his presentation, Mr. Tift repeated his introductory joke and reiterated: “We’re definitely in the right industry.”

The client’s perspective

Next up in the presentation was Ms. Alloway of Alegent Health Lakeside Hospital in Omaha. She described the leasing effort for Professional Center North, a four-story, 100,000 square foot MOB that Alegent developed in partnership with DASCO.

(For a complete recap of Ms. Alloway’s presentation, plus additional information on the Lakeside project, please see the Project Case Study “Cooperation was key to leasing this MOB” on Page 18.)

After Ms. Alloway’s presentation, the panel fielded several audience questions.

Asked about trends in space needs, Mr. Tift of HealthAmerica said: “We’ve seen an increase in the size of the practices.” He said he thinks that’s because physicians are looking for additional ways to generate revenue through additional services, such as imaging or surgery, and they need space to accommodate those services.

“Overall, I agree, I’ve seen physician private practices grow,” Mr. Johnson of Trammell Crow said, adding that physician groups are including more equipment for treatment and imaging in their offices as a way to increase revenues.

On the other hand, Alegent’s Ms. Alloway said, some spaces are becoming smaller because billing and medical records can be digitized or moved off site.

Mr. Tift said he is also seeing more shared space.

What about exclusives?

Another audience member asked about how the panelists handle requests for exclusives. For example, what if a 10,000 square foot orthopedic group asks to be the only ortho group in a 100,000 square foot building?

“A lot of it depends on supply and demand in the marketplace,” Mr. Tift replied. He said he probably wouldn’t give an exclusive to a 10,000 square foot tenant in a 100,000 square foot building, but he might give an exclusive to the same tenant in a 30,000 square foot building. It would become part of the negotiations, he said.

Mr. Johnson said he’s never given an exclusive.

“You’ve got to treat the orthopedic surgeon, the cardiovascular surgeon, the neurosurgeon just like you treat the pediatrician,” he said. The only exclusive is that they do not compete with the hospital, he said. They can have their own imaging, but they can’t re-sell that capability to others. It’s for their exclusive use.

Another audience member asked how the panelists measure tenant satisfaction.

Mr. Tift said HealthAmerica uses commercial real estate research firm Kingsley Associates to conduct surveys. He said another way to track tenant satisfaction is to be in constant contact with the physicians and take their feedback seriously.

Mr. Johnson noted that Trammell Crow conducts four surveys a year.

Kathleen Huff, vice president-client services for DASCO, said that the company does its own survey and that it has two basic typces: one takes place when a building opens; the other is an annual follow-up.

“And it’s amazing how honest and direct some of your responses can be,” she said of the company’s internal surveys. “But it gives us the ammunition we need then to follow up if there are issues.”q