CREJ

Page 8

— Health Care Properties Quarterly — January 2017

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Development

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Healthcare Constrcution <$1M - $500M +

UCHealth Eye Center

Saint Joseph Hospital

Poudre Valley Hospital NICU

Lutheran Medical Center

CU Sports Medicine & Performance Center

Leasing

parade of screaming, sick

children. A dead body on a

gurney in a public hall. A

mother giving birth in an

elevator. It’s not a movie but

simply another day in the life of a

medical office building.

Leasing and managing any com-

mercial office building or public

facility has challenges. Medical office

building leasing brokers and prop-

erty managers, however, encounter a

unique set of trials and tribulations

not seen in garden-variety property

management. An informal survey

of Cushman &Wakefield MOB leas-

ing brokers and property manag-

ers reveals a few common threads:

MOBs are very busy – seeing much

heavier foot traffic than traditional

commercial office buildings, proper

cleaning is critical and leasing activi-

ties are highly regulated and chal-

lenging.

In contrast to conventional office

buildings, medical office buildings

are often high-traffic spaces. Physi-

cian tenants receive a constant flow

of patients, beginning very early

in the morning and continuing

throughout the day. A high percent-

age of building visitors are children

– sick children – unhappy with their

circumstances, escorted by direc-

tionally challenged and frazzled

caregivers. Depending on its loca-

tion, an MOB may receive visitors

from across a broad socio-economic

spectrum, highlighting the impor-

tance of convenient public trans-

portation and a supportive building

staff. And with all those visitors,

MOBs use a tremendous amount of

paper products and

hand soap!

Considering all

that traffic, medi-

cal office build-

ings are bound to

get dirty. Janitorial

services are vitally

important in any

building but in

a medical office

building, proper

cleaning could be

a matter of life

and death. Exam

rooms exposed to

infectious diseases, bed bugs and

dangerous viruses must be sealed

and methodically cleaned from floor

to ceiling before another patient is

seen. Blood, vomit and other body

fluids are common clean-up calls

and must be handled according

to stringent protocol. Most MOBs

have a greater hard floor-to-carpet

ratio compared to a typical office

building, extending the overnight

cleaning time and subsequent cost.

Spaces housing sensitive medical

records may require special schedul-

ing or supervision for cleaning. And,

of course, disposal of medical waste

– aka “Red Bags” – has its own set of

critical rules.

Finally – unlike ordinary build-

ings – leasing space in a medical

office building is a highly regulated

affair. Federal law requires health

systems leasing space to physi-

cian tenants comply with strict

guidelines controlling referrals and

kickbacks to hospitals. The so-called

“Stark” law and anti-kickback regu-

lations require lease rates mirror

fair market value rates – typically

determined by a third-party evalu-

ator. As a result, room for negotiat-

ing lease rates is small and factors

that might not impact commercial

leases, such as access and use of

diagnostic equipment (MRI, CT scan,

lab services) may be factored into

the lease rates. With these regula-

tions and requirements managing

an MOB lease portfolio can be quite

labor intensive with multiple lay-

ers of oversight, ensuring the client

remains compliant and avoids costly

fines. Timeshares – space sharing by

physicians, particularly in remote

locations – add lease administration

intensity.

Mergers and acquisitions keep

the health care industry in constant

change. MOB leasing brokers are

acutely tuned in to the M&A activ-

ity and the changes that may affect

occupancy and overall operations of

a medical office asset. Acquisition

trends target vertical attainment

of physician practices and clinics,

and digital trends remain a strong

growth area expected to continue

in 2017. These trends keep constant

pressure on medical office buildings’

occupancy levels. Patient access

requirements of hospital systems

also force recognition of leasing

challenges of MOBs as community

retail assets become in focus. Bot-

tom line: Hospital acquisitions of

physician practices may boast or

burst the bottom line when consid-

ering the potential change to the

tenant roster and overall occupancy

stability of the physician tenants.

Leasing and managing a medical

office building is not for the faint of

heart. But maintaining a strong rela-

tionship with tenants, developing a

deep bench of well-trained techni-

cians and service providers, and har-

boring a flexible attitude can make

the craziest of days a little easier to

manage. Choose your professional

wisely, one who understands the

effort, expertise and time it takes to

ensure medical office buildings run

smoothly.

It’s not just an office building with doctors

Stuart Thomas

Senior associate,

Healthcare Practice

Group, Cushman &

Wakefield, Denver

Medical office

building leasing

brokers and property

managers, however,

encounter a unique

set of trials and

tribulations not

seen in garden-

variety property

management.