Humming with healthcare

‘DOUBLE WHAMMY’ KEEPS ATLANTA MARKET HOPPING

 

By Jessica Griffith

 

A one-two demographic punch is keeping Atlanta’s demand for healthcare ahead of its supply.

“We’ve got a double whammy going on,” says Thomas W. Tift III, president and CEO of Atlanta-based HealthAmerica Realty Group. “Atlanta is growing so fast plus the baby boomers are aging and that is putting a real stress on the healthcare system here.”

The metropolitan area just keeps expanding, says Carleton A. Ohly, president, principal and co-founder of healthcare developer Meadows & Ohly LLC, which is based in Atlanta.

“I am an Atlanta native and places like Flowery Branch, Forsyth County and Cartersville used to be almost an overnight drive,” he says. “Now, with the interstates, they’re just suburbs.”

Metropolitan Atlanta includes 28 counties and about 5.4 million people, making it difficult to summarize the healthcare real estate market. The metro area also has no natural boundaries, which means residents keep moving farther and farther into suburbs and exurbs, with hospitals and physicians following those patients, says David Rubenstein, principal of The Miller Richmond Co.

Local real estate professionals divide the Atlanta area into multiple submarkets, several of which have experienced significant activity.

“It is hard to call Atlanta one giant market,” Mr. Tift says.

Pricey Piedmont

The Piedmont Hospital submarket is located in the Buckhead neighborhood, formerly a bar and party destination and now a center for upscale housing. Having a landlocked campus makes it difficult to add medical office space near Piedmont, Mr. Tift says.

Vacancies are very low, around 4 percent, says Norm LeZotte, managing director of the senior housing/healthcare group for Cushman & Wakefield of Georgia.

Most buildings are fully leased, adds Scott Taylor, president of Carter and Associates. The firm recently broke ground on a medical office building (MOB) 1.2 miles from Piedmont Hospital at Interstate 75 and Howell Mill Road.

“We were aware that Piedmont was out in the market looking for alternative locations for its outpatient facilities, so we secured the land and approached Piedmont,” Mr. Taylor says.

The 256,000 square foot Piedmont West Medical Office Park is scheduled to open in September 2008, and the site has room for a second, 200,000 square foot building. Piedmont Hospital has agreed to occupy 75,000 square feet in the new building and Mr. Taylor says the space will house outpatient surgical care.

Total project cost is more than $75 million. Rents are $32.50 gross and $22 net.

Established Pill Hill

The greatest concentration of healthcare facilities in the Atlanta area can be found in Pill Hill, where three hospitals converge: Children’s Healthcare of Atlanta, St. Joseph’s Hospital of Atlanta and Northside Hospital.

Of these, Northside has experienced the most construction in recent months. The hospital opened a 150,000 square foot MOB in 2005 and is expanding and renovating its women’s center on the main Sandy Springs campus. A new women’s center also is under construction on the Forsyth campus; a surgery center opened last year.

MOB vacancy rates hover around 5 percent for on-campus, Class A medical office space in Pill Hill, Mr. LeZotte says.

Physicians are looking for 15,000 to 25,000 square feet, but the spaces that are available tend to be smaller – in the 1,500 to 3,500 square foot range, he adds. Many practices are solving the problem by leasing non-contiguous offices on separate floors of a building.

HealthAmerica manages a 100,000 square foot building a mile from the St. Joseph’s campus and the owners are converting it from office to medical space. HCA already has leased 40,000 square feet for a surgery center.

Not only has the metro area’s population grown and expanded outward, but the number of children has grown rapidly as well. According to Children’s Healthcare, which owns two hospitals and operates another, the Atlanta area’s pediatric population is expected grow by 120,000 by the year 2009.

In response, Children’s Healthcare in 2004 embarked on a $365 expansion at its Egleston and Scottish Rite hospitals. Those projects are coming on line in phases starting this year and are adding a total of 70 beds – bringing each hospital’s total to 250 beds. The expansion project is the largest by one system in the history of Georgia.

In addition, Children’s Healthcare in February announced that it is planning to build a new $35 million hospital on Pill Hill in central Atlanta, on the site of the current Children’s Healthcare at Hughes Spalding Hospital. The Hughes Spalding facility is owned by Grady Health System, a public health system, and operated by Children’s Health. The plan calls for a $35 million project that would add new inpatient beds, a new emergency department, and other facilities and services.

Northern expansion

North Fulton Regional Hospital in Roswell is expanding to serve this rapidly growing area of Atlanta, located north of the capital city.

“The younger population is driving a need for more primary care,” says Steve Hall, vice president of leasing and sales for HealthAmerica.

Tenet Healthcare Corp. (NYSE: THC) owns North Fulton Regional and, in its efforts to keep up with demand, is adding a $43 million patient tower with 37 beds, operating suites and post-anesthesia and critical care units. The hospital also is renovating its existing building.

These developments are creating a need for more medical office buildings, Mr. Hall says.

“The hospital is in a huge growth mode but there is no medical office space to accommodate that,” he says.

Engineering Design Technologies just completed a 27,000 square foot building on Upper Hembree Road, and Mr. Hall says another developer is considering some medical office condominiums in the area.

Existing space includes the 58,000 square foot North Fulton Medical Arts Center and the 1240, 1250, 1260 Upper Hembree medical plaza, with a total of 34,000 square feet. Some of the tenants in those buildings are planning to move to the new Engineering Design Technologies building, Mr. Hall says.

Growing Johns Creek

This newly incorporated city is home to the brand-new, 110-bed Emory Johns Creek Hospital. A 135,000 square foot MOB also is on the campus. Emory Johns Creek opened in February and replaces Emory Dunwoody Medical Center, which closed in December.

Lauth Property Group in Indianapolis is building a 95,000 square foot MOB across the street from the new hospital, says Todd Jensen, senior vice president for healthcare. The project broke ground this month (July) and will open in spring 2008. Mr. Jensen says several potential tenants have shown interest but no leases had been signed as of late June. Rental rates are $23.50 per square foot, net.

“Our analysis indicates there is demand,” says Mr. Jensen. “The demographics are fantastic and population density is good; plus growth rates and median income are strong.”

An MOB on the hospital campus is nearly full, he adds, noting that Lauth had been waiting for an opportunity to enter the Atlanta market for several years.

“Our man in Charlotte (N.C.) who covers Atlanta has been looking at the market for years,” he says. “He came to me and said, ‘I think I found the best site in all of Atlanta for medical development.’ When he told me the price, I told him to keep looking, but once I went there and toured the site, I immediately agreed with him.”

The site has room for a second building but, to date, Lauth has no such plans. However, Mr. Jensen says he has received inquiries from firms that might be interested in building an assisted living facility.

Surging satellites

A pair of trends related to population growth will likely have an effect on the Atlanta healthcare market in the coming years.

Nearly every hospital in Atlanta needs more beds, and many of these hospitals are building satellites in outlying counties, Mr. Ohly says. Some of the satellite facilities contain patient beds while others focus on outpatient care.

One example is Southern Regional Medical Center in Jonesboro, south of Atlanta. Meadows & Ohly recently broke ground on an MOB at a mixed-use development called Spivey Station in Jonesboro. Construction on a surgery center is set to begin later this year and three additional MOBs are being planned.

The first MOB already is 85 percent preleased, and Meadows & Ohly has plans for an 80,000 square foot MOB on Southern’s main campus in Riverdale, located west of Jonesboro.

Docs take stake

Another potential force in the market is a shift from physician leases to physician ownership. This, too, is based on demographics.

“Atlanta has evolved from a market with a lot of small, solo practices,” Mr. Rubenstein says. “There has been a wave of consolidation in the last 10 years and we’ve developed a good stable of large, multilocational practices.”

This trend has occurred for several reasons, including a desire to streamline practices and the financial realities of managed care. As physicians consolidated, they began to purchase their own buildings or invest in shares of their buildings, Mr. Rubenstein adds.

“It is a good opportunity to leverage their size as a tenant into an investment opportunity,” he says.

“Physicians are investing,” Mr. Ohly says. “That is the preferred model for development in the Atlanta market.” Meadows & Ohly has about 700 physician partners in its MOB projects.

Carter is offering physicians equity in its new project near Piedmont, Mr. Taylor says.

Even so, most physicians indeed continue to lease space, Mr. LeZotte adds. The investment cost often is prohibitive, and most MOBs are sold to institutional investors with deep pockets and an appetite for the stability of the MOB market.

“We have a lot of medical office buildings listed for sale and the demand is off the charts,” he says. “It is hard for a physician group to compete with foreign capital investors.”

Mr. Hall says he has lost three tenants in two years after they bought or built buildings. He agrees cost can be a barrier, but rapidly growing practices face another challenge when looking to own a building: The space that fits today might be a squeeze next month or next year as more doctors join the partnership.

Tenant improvement costs also can tip the balance in favor of leasing, Mr. Hall says. For this reason, there has been more activity in second-generation space.

“We see that doctors are less interested when they see what they will have to pay out of pocket,” Mr. Hall says. “If a practice has to put out $30 to $40 per square foot, they may lease in an existing building instead. They are sharpening their pencils when it comes to specific transactions. The buzzword is to get equity, but when the costs come back, some physicians are unable to pull the trigger and they end up leasing.” q

 

Jessica Griffith is a business writer and a frequent contributor to Healthcare Real Estate Insights^™.