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Compass Management
Compass Management
Compass Management

Major Effects On The Medical Office Market

The economy and upcoming HealthCare Reform have increased the complexity of the Medical Office Market and the challenges for its management.

The nation’s failing economy is certainly having an adverse effect on the residential and commercial markets; but what about the medical office market, has it been spared by our economic problems? Absolutely not! Some Economists are predicting that this will not be a short recession with a rapid recovery; but just the opposite. A prolonged recovery will affect the medical office market just as it will the commercial market; and in both cases the challenges for the real estate management companies will be significantly increased.

As our economic problems continue, unemployment remains high, money becomes increasingly tight, and the public cuts healthcare costs from their discretionary spending. This reduces physician’s billings, and in turn, their income, which means less money to pay their overhead expenses, including rent. Companies that manage medical office portfolios are expected to protect the Landlord’s bottom line by putting more energy into collecting rents, avoiding increased legal fees, and minimizing the number of vacant spaces resulting from closed practices.

In addition to the economy, the medical office market has been affected by upcoming HealthCare Reform. A year and a half ago, before President Obama and Congress decided what HealthCare Reform would include, doctors (especially those nearing retirement) were concerned about signing lease renewals, especially long term renewals. They were afraid that the coming reforms could further reduce their government funded reimbursements (i.e. Medicare) and force them to close their practice while still being responsible for a long term lease. Many were waiting until the last possible moment to sign renewals, and then, at the 11th hour, they would only sign a one year renewal, creating instability in the medical office market. The passing of the Reform Bill, with respect to the medical office market, is a good thing, no matter which side of the isle you sit on. Physicians may, or may not, like the changes, but at least they have an idea of what is going to change and how it will affect their income; knowing this allows them to make changes to reduce costs and increase income (i.e. switching from paper records to electronic medical records, reducing staff, and taking on new patients). Being able to plan, also means that they are more able to commit to long term leases; as such, many physicians are again signing 3 – 5 year leases.

Physicians who must cut costs have at least two additional options that will directly affect the medical office market. They may combine practices with other physicians, or “sell” their private practice to a hospital system and become an employee of that hospital.

Combining private practices with another physician could have either of two effects on the market. If the new “combined practice” is staying in the same building, or on campus, it could mean a new lease with more square footage and a longer term. However, combining practices may also mean that at least one physician will not renew a lease or may even try to terminate a lease early. In this case, the resulting vacant space may take months and a lot of tenant improvement dollars, to re-let. The other option for cutting expenses (“selling” a practice to a hospital system) frequently offers the best options for the medical office market; the hospital may choose to assume the practice’s existing lease, or may sign a new lease and build out new space. With either of these options the market should remain healthy with long term leases and dependable rental income.

The medical office market is definitely unique; a wide variety of outside influences means that even with a good economy the medical office market may be bad, and vice versa. Clearly, the medical office market has been, and will continue to be, adversely effected by a poor economy; medical practices may be less prone to an industry wide collapse/bankruptcy (i.e. auto production companies) but they are just as susceptible to a loss of income caused by government actions and/or the nation’s economy. In the meantime, we, as Real Estate Managers in the medical office market, are looking for ways to support our tenants and our clients and minimize the effects that this economy and the upcoming HealthCare Reforms will have on their business.