Medical Office Buildings: A Class Of Its Own

Ninety-nine percent of real estate service platforms consider office and medical office one in the same. They are not. There are numerous differences between medical office space and standard office space. The most obvious are rental rates, expenses, tenant mix, construction costs, tenant improvement allowance, and building features such as elevators and parking. In addition, the proximity and the financial condition of an adjoining hospital should be examined. These examples do not even begin to touch upon the intricacies within the healthcare system itself, which is of unique consideration when purchasing a medical office building.

Medical office buildings (MOBs) are deemed “specialty use” real estate. From our perspective, many lenders will consider financing MOBs, but most lack the experience in transactions or simple dealings. Thus, identifying capable players within this asset class is critical. Whether traditional debt, fully amortized structures or even shorter term, higher leverage deals, the MOB is becoming a greater diversification tool for lenders and investors alike.

While government involvement has had a tremendous impact on the past, present and future of the healthcare industry, demographic changes that include an aging population and a increasingly informed and health conscious society is guaranteed to increase demand for years to come. Consolidation will remain a continuing trend for practice groups that lack association with stronger, more diverse physician networks and/or hospital systems. This will have a negative impact on buildings with small, not very well connected and/or aging physician groups.

As for funding, financial sponsorship remains essential to MOB transactions, especially off-campus assets. Here, owner-occupied doctor groups or hospitals themselves receive favorable underwriting treatment. The commitment to their investments and their businesses will be of tremendous importance. Of greater impact is sponsorship that features a commercial real estate firm or private equity company who joint ventures with tenants. Some of the most aggressive lending structures are dedicated to this type of partnership.

Lenders prefer on-campus MOBs, however locating and underwriting these investments can become complicated due to bond financing or land lease issues. Thus, finding the medical office property within the tight radius of the hospital might just be as easy to work, if not easier.

In terms of the lender’s perception of the development and ownership of real estate, a lot has changed after a strong run in the middle of the last decade. Healthcare is no longer deemed recession-proof and, without government support (loose term), it instead operates like the majority of for-profit businesses which became severely impacted by the credit crisis of 2008/09.

While this distinct type of investment is certainly not immune to the juggling act that is supply and demand in a highly levered world, as the economy rehabilitates, the medical office building is becoming one of the most aggressively sought after asset types within the healthcare real estate sector. Call 713-701-7900 to request assistance with one of our several MOB opportunities.

Office Building Design: From the Inside Out

After walking through thousands of corporate and medical office spaces, based upon the building’s construction, we certainly believe that the efficiency of architect’s plan is of greater importance than the developer’s goal for a tract of land.

We continue to work with developers, most of which are beginning to see signs of life for their projects, whereby we provide formal studies for any specific submarket, comparable market analysis, tenant expansion or relocation, demographic studies and leading economic indicators.  But, to be quite honest, the developer is often in too strong of a position and can influence how, what and who will build on the tract.  This is why we feel securing a developer or architect who uses multiple, not individual, armies (w/ proven strategies) to construct a building will provide the best opportunities in this new commercial real estate marketplace.

When planning to construct an office building, it is important to ensure that the architect that is chosen has performed a tremendous amount of office interior space planning work as there are many variables that can affect the amount of space that a prospective tenant will require in a given building.

We have added some special guidance below to assist in the consideration of an office development.  An inside out approach to office design and construction; a few items to analyze in greater detail when assembling your team for an office project:

1. Window mullion spacing: Most office buildings that we usually comb maintain a 5′-0″ o.c. mullion spacing.  Every now and again we come across a project where the mullion spacing is as little as 4′-0″ o.c. or as large as 6′-0″ o.c. The problem is that, with companies now having fewer tiers of management structures, most of the staff will either be assigned an open office work station of some size (either 6’x6′, 6’x8′ or 8’x8′ in size) or a private office (roughly 10′ w. x 12′-15′ d.). When one has to plan office space in a building with larger mullion spacing, such as 6′-0″ o.c., the company has to provide 20% more window perimeter for each (10′ w.) office thus getting fewer people on the outside window wall.

2. Column size & spacing: Office buildings are typically framed in one of two ways: either steel frame and steel columns (which are relatively small – generally 1 to 2.5 square feet in area) or concrete frame and concrete columns. Poured concrete buildings are great for fireproofing and soundproofing. They also provide for superb impact sound resistance characteristics, but in concrete buildings that have a minimum floor plate size of 25,000 – 30,000 square feet, these columns will generally be12-15 square feet in size, thus effectively blowing out a full work station.

3. Column spacing: It is fair to assume that a building with a larger column spacing makes it easier to plan reliable office space. An example of this is the former World Trade Center Towers in New York City. While their floor plate size was exactly 40,000 square feet (quite large for any office building), the entire floor plate was column free, from the central core to the outer wall.

4. Building shape: Quite simply, if a tenant wants to get a maximum number of employees in the least amount of space, then a building planned on an orthogonal grid, or composed of right angles, is the most efficient one.

5. Floor plate size and shape: It is generally more appealing for a tenant to be in a space that has greater window perimeter and shallow floor depth to get more of their employees to enjoy daylight and view. For example, if a tenant is looking to rent only10,000 square feet, he will generally end up in a better space if he moved into a building having a floor plate size of 20,000 square feet than into a building having a floor plate size of 40,000 square feet.

6. Core factor: What a tenant can actually only use is the net (usable) area of his space. So if he needs 10,000 usable square feet, he will pay less rent overall, if he can get that amount of space in a building only having a 15% core factor than one maintaining a 25% core factor.

7. Another issue that impacts the utility of a given floor plate is the location of the building core (where are the elevators, stairwells and bathrooms located). If it is unique (off-center) or if the fire stairs aren’t placed far enough apart, it will have a serious impact on the size of the tenant that can fit on a given floor.  This typically means that only larger sized tenants can fit (fire code regulations) because of the issue of providing two means of egress.

Efficiency in today’s building environment is absolutely essential and we certainly feel our partnership with multiple developers, architects and construction companies will protect your project from wasted space — and money.

Boxer Property Continues Its 2010 Buying Streak

So far this year, Boxer Property has acquired 10 office buildings totaling more than 2.3 million square feet. The local company has four more buildings totaling 550,000 square feet under contract and plans to search out at least a couple more acquisitions by year end.
 
“This is our most active year for acquisitions by far,” says David Kayle, a member of the firm’s acquisitions team. “This is the most square feet we’ve ever acquired in one year. We’re buying bigger buildings and taking advantage of distress in the market. It’s a great opportunity.”
 

For complete article, go to Globest.com.


Your link to this week’s Greater Houston real estate and business stories from local, regional and national publications.  For a complimentary assessment of your commercial real estate interests, please contact Robert S. “Bob” Lowery.

PIMCO Project: Commercial Real Estate

PIMCO on the Commercial Real Estate Market:

  • Capital has returned and high levels of bidding activity in certain sectors (but) transactions have been limited in trophy properties and properties where below-market agency financing is available
  • On the debt side, insurance companies are actively looking to finance quality properties, for Wall Street conduit groups are re-forming and several private debt vehicles are raising capital
  • Manhattan and Washington D.C., where demand from foreign capital has led to recent office trades at capitalization rates and per-square-foot values close to peak prices in 2006 and 2007
  • (Multifamily) transactions pricing in the 5% to 6% cap rate range
  • Local investors perplexed by the extent of non-U.S. capital funneling into their market
  • Prolonged deleveraging process is expected to result in a sustained period of limited price transparency and risk aversion

But, PIMCO suggests…

  • Many CRE assets likely will not return to 2007 prices until the end of this decade
  • Macroeconomic factors will force the market to re-evaluate assumptions it has used to price CRE
  • Prolonged deleveraging process is expected to result in a sustained period of limited price transparency and risk aversion

And, a ton more…

Weekly Rewind: December 21-25

Top 10 Houston Blogs – As I See It

Off the Kuff

A Progressive political blog.

Latest Posts:

  • Judicial Q&A: Cheryl Harris Diggs
  • Precinct Analysis, District Council
  • Here Come the Gay Tourists
  • Bellaire Bans Texting While Driving
  • RIP, Laff Stop

Hair Balls

Houston Press Spin-Off.  Hilarious.

Latest Posts:

  • All of Sharpstown Mall’s Problems to be Solved with Name Change
  • More Allegations of Sexual Harrassment and Abuse at the Houston Humane Society
  • Business is Booming in the DWI-Arrest Industry
  • Game Time: My Plea to In-And-Out Burger…Let Me Speak for You
  • Survey of Top Pop Culture Dogs Proves Aggies may have Skewed Priorities

Houston Strategies

An open dialogue on serious strategies for making Houston a better city, as well a coalition-builder to make it happen.

Latest Posts:

  • An Agenda for Mayor Parker
  • World’s Smartest Cities
  • Comparing Texas’ Big 4 Metro Economies
  • Houston VS. Chicago, Seattle, Portland
  • Houston One of Five Cities that will Rise in the New Economy

BlogHouston

Focuses on Houston politics, media, and life.

Latest Posts:

  • What’s the Status of the City’s Sorely Needed New Emergency Radio Network?
  • Big Sports News in Recent Days
  • City of Houston to Harris County:
  • Metro Chairman David Wolff’s Admonition
  • Good News for Ice Cream Lovers

Houston Clear Thinkers

Observations on developments in law, business, medicine, culture, sports and other matters.

Latest Posts:

  • That Wild Landry’s Ride Continues
  • They Got How Much?  For Doing What?
  • Mr. Ruehle, You are a Free Man
  • Criminalizing the Neighborhood Pharmacist
  • How Many Felonies did you Commit Today?

Houston Tomorrow

Collection of writings from Houston’s Visionaries.

Latest Posts:

  • Houstonians Want Safer Streets
  • The Case for an Energy Tax
  • Perception vs. Reality
  • Block by Block Sustainability
  • Sprawl has passed into History

Bay Area Houston

Dedicated towards Clear Lake, Houston, and Political Junkies.

Latest Posts:

  • A Republican in Democratic Judicial Clothing
  • Harris County GOP Insanity
  • Kay Bailey’s Whataburger Commercial
  • Surprise! Texas Tort Reform Didn’t Work!
  • What a Kinky Idiot

Houstonist

Collection of Houston Pictures, Food, Music and Beverage.

Latest Posts:

  • St. Arnold Brew News
  • H-Town Rock
  • Eat This: French Onion Soup
  • Houstonist Photo of the Day: Antique Running
  • You Wanted the Best! You Got the Best!

Swamplot

Covers real estate, home design and renovation, architecture, and the landscape of Houston.

Latest Posts:

  • Saved by a Ham: The Museum Plan for Immanuel Lutheran Church
  • Daily Demolition Report: Demo Defender
  • Greatest Moment in Real Estate 2009
  • Rail Removal Program Complete for the Year: Heights Hike and Bike Trail Opens
  • Haven is Open:  Modern Texas Cuisine – Algerian Way

Culture Map

Everything Houston.  Great site that toes the line of news and blog.

Latest Posts:

  • No Joke: Houston’s Legendary Laff Stop Closes
  • Is Houston Shrinking?
  • Where to Eat on Christmas
  • Plan proposed to save Historic Heights Church
  • D-Box Motion Movie Seats come to Tomball

Honorable Mention:

SpaceRef

Startup Houston

NeoHouston

Voted by Robert S. “Bob” Lowery

Weekly Rewind / December 7-11