News & Analysis: Reform equals MOB boon

MARCUS & MILLICHAP: DEMAND COULD BE 61M S.F.

By John Mugford

For quite some time now, healthcare real estate professionals have been saying that the passage of some form of universal healthcare coverage would likely result in increased demand for medical office buildings (MOBs) as well as other outpatient facilities.

While such professionals have been passing along this prognostication in industry publications and at healthcare real estate conferences throughout the country, there has been no specific estimate of how much space would be needed if many of the estimated 46 million people who are currently uninsured indeed received coverage.

That is until recent months, when national real estate firm Marcus & Millichap Real Estate Investment Services researched the topic and issued a report titled, “Healthcare Reform: A Winning Prognosis for Medical Office Investments.”

The report was researched and coordinated by John Chang, Marcus & Millichap’s national research manager, along with Tom Hershey of the company’s research services division.

The Encino, Calif.-based company, which includes a large healthcare concentration, has looked at two scenarios to determine how much new medical office space would be needed if President Barack Obama’s proposed health insurance program were enacted this year.

Under one perspective – the amount of MOB square footage needed per insured person – the nation would need to add up to 61.9 million square feet to keep up with the demand.

Currently, there is about 551.96 million square feet of medical office space in the country, according to Mr. Chang. With about 84 percent of population being insured, that means there is about 1.9 square feet of MOB space per insured person.

This additional 61.9 million square feet would be in addition to the amount of space needed to meet the needs of an aging population.

Another perspective – the amount of MOB square footage needed per physician – would see far less demand for new space. According to Marcus & Millichap’s report, an estimated 8,000 new primary care physicians would be needed to satisfy the demand generated by healthcare reform. The current primary care occupies an average of 1,780 square feet of MOB space.

In its report, Marcus & Millichap states that it might take time for the healthcare community to add 8,000 physicians.

However, even if half that number was added, the country would need an additional 7 million square feet of new MOB space just to meet the needs of the newly insured individuals.

While the square footage figures vary greatly under the two perspectives, Mr. Chang says that if some form of healthcare reform is passed, there will be a definite need for additional space.

“Even the country adds just half of the new primary care physicians needed, there’s a need for a lot more space on top of what is needed to meet the demands of an aging population,” he says.

According to figures Mr. Chang provided to Healthcare Real Estate Insights^™, the amount of newly constructed MOB space steadily increased to an estimated 17.5 million square feet in 2008 from 13.3 million square feet in 2004.

The firm’s estimate for 2009 is a total of 14.1 million square feet of new construction.

Mass. as example

In doing its research, Marcus & Millichap used Massachusetts and its healthcare coverage plan as an example. Since the state’s plan was passed in 2006, there has been “significant” impact on the medical office sector, according to the report.

In fact, even though demand for healthcare has resulted in a shortage of healthcare professionals, developers added 1.8 million square feet of new MOB space in Massachusetts since 2006. That’s a 14 percent increase in MOB inventory, according Marcus & Millichap.

On top of that, absorption has been “robust,” the company notes, as 85 percent of the new space is occupied.

Also, the state’s MOB vacancy rate is one of the lowest in the country at just above 9 percent.

At present, rising medical costs, a lack of access and quality concerns are preventing many Americans from seeking regular care. Compounding these problems are economic uncertainty, extreme job losses and corporate benefit cuts.

In spite of the issues, the medical office sector is outperforming traditional office properties, and demand should increase considerably as a growing share of the population is covered by health insurance.

Baby boomers, too

The Marcus & Millichap report also indicates that the number of physician office visits by baby boomers continues to increase – up about 7 percent nationwide during the past decade.

Should the number of insured baby boomers increase to 95 percent of the age group’s population, that would mean an additional 5,400 general practitioners would be needed just to meet the demand from this age cohort alone.

That translates into a need for 10 million square feet of new MOB space across the country to accommodate the needs of people between 45 and 64.

The report indicates that the MOB sector’s resilience, even during the recession, can be attributed to a “combination of variables, including technological advances and medical innovations that continue to extend life spans, as well as the aging baby boomer generation.”

Indeed the baby boom generation is one of the keys to a potential building boom.

“At present, baby boomers account for 29 percent of the total uninsured yet represent almost one-third of all physician office visits,” according to the report. “Proposed changes to the healthcare system will dramatically increase demand for medical services among this group.”

Reducing costs

The goal of the Obama administration is to eventually cover all Americans with health insurance, as well as reduce the costs of healthcare. A group of supporters, which includes a broad coalition of healthcare and doctor associations, insurance companies, and pharmaceutical companies, believes the country can shave 1.5 percentage points from the growth rate of U.S. healthcare costs during the next 10 years, a savings of about $2 trillion.

Despite continually rising costs of healthcare, office visits to doctors have increased 13.2 percent during the past 10 years. President Obama wants to reduce costs on the order of saving a typical family up to $2,500 per year through new reforms. Proposals include a new public insurance plan based on benefits available to members of Congress that would allow individuals and small businesses to purchase affordable healthcare coverage.

If costs decline as projected, insured and uninsured alike are expected to increase their utilization of primary and specialty care physicians.

The resulting surge would intensify demand for physicians and nurses, which would, in turn, heighten the need for medical office space.

The report notes that providing health insurance to more people is certain to generate increased demand for medical services in MOBs while reducing pressure on emergency rooms, where many uninsured people receive healthcare services. The uninsured and underinsured currently comprise about 17 percent of emergency room visits but only 4 percent of physician office appointments, the report states.

MOB sector still strong

Despite the recession, medical office properties “have performed favorably, and demand is set to accelerate as medical reform is phased in over the next several years,” the Marcus & Millichap report says.

Nationwide, the MOB vacancy rate was 11.6 percent in May, up only 100 basis points from a year ago. General office vacancy, by comparison, was at 15.2 percent in May, a 240 basis point increase during the same period.