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Health Care Reforms Slow to Impact Real Estate

Sun, 03/27/2011 - 11:35pm
San Diego Business Journal

A year after landmark national health care reforms were signed into law, local observers say the impact on medical-related real estate has yet to be seen on a large scale.

Thats because many provisions of the affordable-care legislation, aiming to provide coverage to as many as 30 million previously uninsured Americans, have not taken effect.

For now, experts say health care real estate in 2011 will see trends similar to 2010. Hospitals, doctors, insurers and other providers will likely be focused on expansion through acquisition and renovation of existing buildings, rather than new construction.

"Its so much cheaper to take over an existing building than to build from the ground up," said Stephen Dok, a San Diego-based senior vice president with brokerage firm Grubb & Ellis Co.

Dok said San Diego Countys health care office vacancy rate finished 2010 at about 9 percent, basically unchanged from where it was at the end of 2009. San Diego has among the lowest health care vacancy rates for large U.S. metro areas.

The market will likely stay tight as long as construction of medical-related office buildings remains at its current near standstill, similar to what is happening with other commercial real estate segments.

Currently, most local health care-related construction is taking place in the public sector. For instance, work is under way on a $450 million hospital at Marine Corps Base Camp Pendleton near Oceanside, and there is also expansion in progress at UC San Diego medical facilities.

Large Acquisition

Elsewhere, acquisitions of older existing medical buildings are becoming more common. Dok said one of the past years largest health care real estate transactions was Rady Childrens Hospital-San Diegos $83 million purchase of the two-building Physicians Medical Center.

The medical office complex, on Frost Street near Radys Kearny Mesa campus, has its own parking structure and a total of more than 173,000 square feet of office space. About a quarter of the space in the larger building and 6 percent in the smaller building was unoccupied at the time the sale closed in December, according to CoStar Group.

"We examined all the pros and cons of buying versus building something new," said Ben Metcalf, public information officer for Rady Childrens Hospital. In addition to saving time and money, he said buying the established property helped the hospital avoid traffic and other disruptions that accompany construction projects.

As health reforms are implemented, potentially bringing new cost and paperwork burdens, Dok said physicians and other providers will be setting up one-stop operations to boost efficiency. For instance, several doctors nationally and locally have already moved to establish their own surgical centers, conducting procedures and administrative duties previously handled only at hospitals.

"The care can actually be better, and it also helps bring down the cost of the procedures, which the insurance companies like very much," Dok said.

Much of that provider expansion will be done through acquisition and leasing of existing spaces.

Alan Coombe, regional manager in the Del Mar office of construction firm Kitchell, said the challenges of building health care facilities in California will likely play a larger role than health care reform in deciding what gets built locally in the next few years.

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