COVER STORY, MARCH 2009

MORE THAN HOSPITALS
Healthcare construction continues in Texas, and a lot of it is focused on medical office buildings.
By Coleman Wood

Today’s healthcare industry in Texas can be seen as constantly changing, both in terms of technology and science, as well as in terms of where and how doctors practice their trade. Add to this an aging Baby Boomer population and older facilities from the time of the Hill-Burton Act in need of replacement, and you have a flurry of new construction that has defied even the worst of economic forecasts. A lot of this construction is concentrated on the medical office properties that feed off of and drive business toward medical centers. But even this sub-sector is changing, as healthcare providers look for new ways to get to their patients.

“Years ago, most everything was hospital or campus-based,” says Matt Anding, a vice president with the Dallas office of brokerage firm Henry S. Miller. “You didn’t see a lot of stand-alone medical or professional offices. To me, there has been more of a trend [now] to get out into the community. So, you see these stand-alone professional office buildings popping up.”

Primary care physicians, especially family practice doctors and pediatricians, are finding that the closer they are to their patients’ homes, the better. Convenience is becoming an important factor people consider when selecting a doctor, as well as a factor doctors consider when selecting an office.

“It used to be hospitals were destination locations. They were located close to city centers right outside of downtown, in both large towns and small cities throughout Texas,” says Ernest Johnson, executive vice president with PM Realty Group. “Now, what we’re seeing is a migration to get closer to interstates or major road access.”

One example Johnson gives of this trend is Texoma Medical Plaza, a three-story, 120,000-square-foot medical office building that PM is developing in the north Texas city of Sherman. The building, which is scheduled to open in the first quarter of 2010, is going in right by a replacement hospital that is being developed by Universal Health Trust. The old hospital was tucked away several miles off the interstate, but the new location will be right on Highway 75. The medical office building is set to take advantage of the demand that will come from physicians wanting highly visible office space that is also right next to the hospital.

“This way, they get greater visibility; it is easier for their patients to find and easier for the doctors to get to. Everything works in their favor,” Johnson says.

PM’s project highlights one of the hottest development corridors in Dallas. Highway 75 going north from Dallas through McKinney has seen one of the biggest jumps in population in the past few years, which has created demand for services.

“As urban sprawl grows northward in the Dallas market, you’re seeing medical development go right along with it,” Anding says.

But the growth in the Dallas/Fort Worth market is not limited to the northern corridors. Two recent completions by PM include Rockwall Medical Center and Lake Pointe Medical Arts. Rockwall Medical Center is a two-story, 89,000-square-foot medical office building located in the Dallas exurb of Rockwall. One of the features of the building is an imaging center, which serves as a good draw for tenants that would need to use imaging services as part of their practices. Lake Point Medical Arts is a two-story, 55,000-square-foot medical office building located in neighboring Rowlett.

Houston also is seeing its share of development, none more so than the Katy Corridor, which follows Interstate 10 west from the Interstate 610 loop to the suburb of Katy. Five hospitals have been completed or are currently under construction along this route, which has also benefited from a recent highway expansion.

“These are all hospitals that have been built in the past 2 years or are under construction right now,” Johnson says. “So the new medical buildings [that are coming up] are all new. This means you have a greater inventory of medical office space along the I-10 corridor, and I think you will have greater demand.”

Factors within the healthcare industry are changing the way doctors look at new office space. Rising costs and lower reimbursement rates from insurance carriers are making practice groups a more common occurrence, as doctors group together as a way of sharing expenses.

“When Medicare reduces their rates, all of the insurance companies follow suit, so doctors are seeing a decrease in their ability to be profitable,” Anding says.

Doctors are reconfiguring their spaces to allow them to do many procedures in-house that were previously conducted in a hospital or other office, both as a way to make things more convenient for the patient, as well as a way to collect more money from insurance providers. As doctors look for ways to cut costs while providing the same level of service, developers are having to keep in tune with their needs.

“New space allows the doctor to completely re-examine the way he or she conducts business — to make the business more efficient for patients and more profitable for him or her,” Johnson says.

While the country is mired in a recession, healthcare remains a resilient industry. A company looking to finance a deal or a new project can still find a willing lender, as healthcare is seen as one of the few stable sectors. Most in the industry understand this, which is why many see healthcare as a safe harbor for weathering the current economic storm.

“In general, healthcare is a pretty stable industry and, from a real estate perspective, it continues to be one of the few industries right now that is able to continue moving things forward,” Anding says.

Johnson looks at it from the consumer angle.

“People may not understand all the intricacies of the medical industry, but what they do understand is if you’re sick, you have to go to a doctor,” Johnson says. “You might be able to make your car last another year or two. You might be able to put off renovations to your kitchen for a few years. You might decide instead of going to college this year, I’ll work and go next year. But if you break your leg, or your lung collapses, or you have cancer or a stroke, you have to go to a doctor — you can’t put that decision off.”

As the state’s population continues to increase, demand for healthcare services will go right along with it. New hospitals and office buildings will need to be constructed, and older buildings will need to be renovated or replaced. Those in commercial real estate are confident that as the economy begins to turn around, healthcare will continue to get stronger.

Green Perspectives: Q&A With Grubb & Ellis’ Henry Hagendorf TREB: Have you noticed an increase in the number of medical office projects applying for sustainable certification?   Hagendorf: There is definitely an increase in LEED-certified medical office building development. In many cases, developers are taking the lead voluntarily and exceeding tenant-driven mandates. While many large corporations have adopted “green” thinking because of LEED influences in building design, smaller tenants, such as private practice medical offices, are not that aware of LEED characteristics or not in a position to dictate them. Life Sciences Plaza One of the biggest LEED projects right now is Life Science Plaza, a 300,000-square-foot, Class A MOB that is being developed by Houston-based PinPoint Commercial LP at the entrance to the Texas Medical Center. According to Bruce Phillips, partner with PinPoint, they are applying for the LEED-Gold certification for the Life Science Plaza because, “We realize that we are in a position to have a material impact on the environment, both inside and outside the Life Science Plaza. Developing to LEED standards is the only sensible and responsible direction for our development.” TREB: What are some of the benefits of locating to a building like this? Hagendorf: The benefits of green buildings include (1) environmental reasons such as enhanced and protected ecosystems, improved water and air quality, and the conservation of natural resources; (2) economic benefits such as reduced operating costs, enhanced asset value and improved employee productivity; and (3) health benefits such as improved air, thermal and acoustic environments, and enhanced occupant comfort and health. LEED promotes a whole-building approach to sustainability by recognizing performance in five key areas of human and environmental health: sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality. TREB: Do you think green building will continue to grow, or will some forgo it in an effort to save money? Hagendorf: Sometimes, building to LEED or similar standards is required by building code ordinances. Austin’s Mueller development, which is being developed by ProLogis/Catellus Development Group, will have up to 4.2 million nonresidential square feet, including office, retail, medical and film production. All development, including multifamily units, will meet a two-star rating in Austin Energy’s program or will be LEED-certified. According to Ryan Keathley, development officer with Catellus, “We have over 1 million square feet of LEED-certified commercial properties in the Mueller community. Everything built here will be green.” Mueller will also include the Dell Children’s Medical Center of Central Texas, which expects to achieve LEED-Platinum certification. Keathley stated that the development standards in the Mueller community were “a corporate, forward thinking/value creation” strategy to meet cutting edge design and construction standards for today and to meet tomorrows expected standards. The general thinking is that the lower the LEED certification level the lower the increases in costs. For example, to obtain the LEED certified status for new construction the costs increases range from 1 to 3 percent. To obtain LEED certified platinum status the costs increases by as much as 10 percent. — Henry Hagendorf is vice president, office & medical properties, investment services with Grubb & Ellis in Houston.

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