CREJ - Healthcare Properties - JANUARY 2017
A 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 commercial office building or public facility has challenges. Medical office building leasing brokers and property managers, however, encounter a unique set of trials and tribulations not seen in garden-variety property management. An informal survey of Cushman & Wakefield MOB leasing brokers and property managers 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 activities are highly regulated and challenging. In contrast to conventional office buildings, medical office buildings are often high-traffic spaces. Physician tenants receive a constant flow of patients, beginning very early in the morning and continuing throughout the day. A high percentage of building visitors are children – sick children – unhappy with their circumstances, escorted by directionally challenged and frazzled caregivers. Depending on its location, an MOB may receive visitors from across a broad socio-economic spectrum, highlighting the importance of convenient public transportation 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, medical office buildings 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 scheduling or supervision for cleaning. And, of course, disposal of medical waste – aka “Red Bags” – has its own set of critical rules. Finally – unlike ordinary buildings – leasing space in a medical office building is a highly regulated affair. Federal law requires health systems leasing space to physician tenants comply with strict guidelines controlling referrals and kickbacks to hospitals. The so-called “Stark” law and anti-kickback regulations require lease rates mirror fair market value rates – typically determined by a third-party evaluator. As a result, room for negotiating 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 regulations and requirements managing an MOB lease portfolio can be quite labor intensive with multiple layers 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 activity 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. Bottom line: Hospital acquisitions of physician practices may boast or burst the bottom line when considering 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 relationship with tenants, developing a deep bench of well-trained technicians and service providers, and harboring 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.