The Orange-Main Medical Plaza building is located at 170 South Main in Orange, California. | Courtesy NAI Capital

How Will SoCal’s Healthcare Real Estate Evolve?

Carrie Rossenfeld Healthcare & Education

As the healthcare industry has changed, so has healthcare real estate — from hospital-focused and sterile environments to sleek and stylish patient- and service-centric models. So, what’s next for this sector?

SoCal Real Estate spoke with two experts in the field — Sonya Dopp-Grech, SVP, director of healthcare services, for NAI Capital in Irvine, California, and Jeff West, executive director, real estate and construction, for Providence St. Joseph Health in Irvine — about how healthcare real estate will continue to evolve in Southern California.

Sonya Dopp-Grech:

Sonya Dopp-Grech | Courtesy a representative of NAI Capital

Healthcare real estate is continually evolving. Since healthcare is a leading industry in Southern California, its effect on real estate can be significant. Key trends that look to be here for the foreseeable future are a focus on patient convenience, increased focus on preventive care and mental health, consolidation, and expanded use of technology.

Medical groups are addressing convenience by reaching out into the communities they serve, with primary-care and specialty-care locations placed throughout the community and a focus on easy access, easy parking, and in many cases multiple services available under one roof. Often these goals can best be served in a retail setting or suburban-style medical-office buildings rather than in the more traditional on-campus medical setting where parking and access are often more challenging.

The medical industry is increasingly focused on providing preventive care as well as expanding access to mental-health care. This growth directly results in increased need for medical space to provide these services.

We have seen consolidation, with many smaller practices opting to merge, join larger practices, and align with hospital groups. These consolidations often result in expanded service offerings for patients and economies of scale for the groups and can allow for the physicians and medical practitioners to allocate more time to patients while handing off administrative duties to others. These consolidations are affecting the real estate market by putting a premium on large blocks of space while oftentimes leaving small spaces unoccupied.

Many older medical-office buildings that were designed for small practices have difficulty accommodating the larger group practices we see today. The result is many of these older buildings are becoming functionally obsolete. In the right location and size, the market may be ripe for new construction. Properties that are obsolete may need to reinvent themselves through redesign or repurposing. With the robust economy and large demand, construction timing and costs are increasing factors.

Technology is everywhere. It affects every aspect of our lives, and this is no different when it comes to healthcare and the healthcare real estate industry. Examples include a move toward online patient consultations. Technology has even changed how the commercial real estate professionals connect with prospective tenants, provide reporting to our clients, and advertise available space. Social media’s prominence has made this platform an important communication tool. Industry-specific programs and apps are widely used. Online marketing and listing services distribute information to a greater extent than ever, and most initial contact with prospective clients and tenants originate online.

Market dynamics, changing patient preferences, and new technology are certain to continue the evolving trend in healthcare real estate for years to come.

Jeff West:

Jeff West | Courtesy Jeff West

There is no doubt the pressures on healthcare systems will continue to increase from several different sources. Aging infrastructure in hospital ministries, seismic compliance challenges, an increased regulatory environment combined with lower reimbursements, effectively moving to a more ambulatory delivery system — these are just a few of the considerations we are looking at as an industry. Just a few years ago we would look at construction projects with the intent of building and holding for the very long term; today, we are trying to look at bricks and mortar as our commercial development partners do, with the added perspective of patient and caregiver experience.

As an organization, the intent is to continue to move our low-acuity cases out of the most expensive setting — our hospitals — while continuing to provide the quality care consistent with our mission and values. We also are focusing on moving lower lengths of stay and avoidable emergency-department admissions to the medical-office and urgent-care settings. We need to provide appropriate access points to our patients that fit their lifestyles: Sally’s broken finger can be seen at the express care or urgent care, not at the hospital.

This ongoing movement out of the hospital is good news for building owners and real estate developers. Hospital systems make terrific-credit tenants, and we add market value to any asset with our lease commitments. Additionally, we are looking for different product types to fit our operations — clinics, retail, and health centers with larger footprints that may include surgery centers. However, with the speed of change in medical-care delivery, we must be agile. How much do we invest in technologies and care-delivery models that eventually may go into care at home or go virtual? What kind of term should we be looking for with our lease commitments?

Overall, I would expect more leased locations with smaller footprints as health systems guard against the new technology and care-at-home models that certainly are going to become more prevalent in the next three to five years. This will create a natural tension with landlords; we may be seeking shorter lease terms, which could conflict with long-term-hold goals for property owners. Both parties will adapt to the new economic model, but there will be plenty of discussion ahead.