Scrivner points to the dichotomy between capital leases and operating leases. “Hospitals are reluctant to enter into long-term leases because they has a negative effect on their balance sheets,” he says. “But it's virtually impossible to deliver without the benefit of a long-term lease—it doesn't make financial sense. Capital leases negatively affect the balance sheet, but it's impossible to deliver cost effectiveness without that long-term lease.”

A lot of new designs are hitting the suburbs, according to Scrivner. Physicians' groups are bringing clinical spaces to these markets. Sometimes taking retail spaces, these clinical spaces range in size from 15,000 to 30,000 square feet and are used by regional operators for urgent care facilities.

But all this moving to the suburbs would mean nothing if not for the Affordable Care Act, which Scrivner says is phasing out the individual practitioner who now may be employed by the hospital. The ACA has required the implementation of electronic records and, says Scrivner, for a lot of physicians, the costs don't justify the expense. “So we're seeing a lot of early retirement, with physicians leaving the marketplace at 60 or 70.

“The new marketplace has also created mergers and acquisitions,” he continues. “Hospitals are actively seeking practice groups when they can acquire the patient group that the practice group has access to.”

Scrivner says because of the demand for acute care and post-acute care facilities, cap rates have been compressed 45 basis points year over year. “It's due to the frenzied demand and limited supply,” he says.

He doesn't see that supply chain changing, though he's cautious about expanding footprints. “There's not a lot of new development except in urgent care and freestanding emergency rooms.” He believes demand will continue for the foreseeable future, with individual 1031 investors and many investors eyeing memory care down the road.

Mindy Berman, managing director of healthcare and capital markets for Jones Lang LaSalle, says historically, healthcare has been a niche. But more mainstream investors have come around to see the returns. “The cap rate premiums are compressed relative to other property types, and MOBs held up well during the recession. Publicly traded healthcare REITs make up 13% of total equity REIT capitalization. But in the past four years, healthcare real estate raised 29% of new capital—disproportionately more capital among REITs.”

Through a still sluggish economy, she points to low risks for investors and much higher returns than money markets or CDs. That, and the low interest rates, make medical office real estate a good proposition for investors. Berman credits the success in part to stable, long-term leases, good credit tenants that don't move frequently resulting lower risk of vacancy.

Build-out, however, is far more expensive—frequently twice as much as using existing space. Favorable locations are close to hospitals, making tenants less likely to move. And it's often not easy to move a medical office where much of the equipment involves imaging equipment, lead vaults and labs.

Berman says an aging population has spawned an interest in senior living. “Senior housing is growing and is culturally more accepted,” she states. “And the first generation baby boomers are right behind them. In memory care, people are living longer—this is a hot growth area. But the risk factors are different as people age out. It's transient in nature.

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“With medical office, we're talking about a 100-basis-point premium, with secondary and tertiary markets trading at lower cap rates. Would you buy office in El Paso? No. Would you buy medical office in El Paso? Yes, on a risk-adjusted basis the returns are superior.”

With $5 billion to $6 billion of trading in medical office per year, the universe of investors becomes smaller. “Values have gone up dramatically,” she says. “I've seen $1,200 per square foot, but that's an aberration; the average is $250.”

The ways in which healthcare is structured have also changed. Twenty years ago, if a person broke a bone—they went to the hospital. Not so now. Healthcare is changing to an outpatient environment, according to Berman.

“The mountain had come to Mohammed,” she says. “Many, many procedures are now done outside of hospitals. And hospitals are building offices within communities where you can get your outpatient care, you have urgent care in a retail setting, you have CVS walk-in clinics—it's convenient. Medical office has high parking requirements and retail can handle that—urgent care is aDevelopment has picked up since the downturn, Berman says, but that's been compounded because doctors have been reticent to acquire more space. “There is virtually no spec building that occurs,” she observes. “Though definitely more this year than ever before.”

One trend Berman is seeing is the consolidation of hospital systems. “Look for them to get larger and larger with more doctors in one location,” she says. “Also, the investor appetite for off-campus is improving and it's proving to price out at the same rate as on-campus sites.”

The Affordable Care Act has left the healthcare system reeling. Berman says the expansion of coverage to an additional 32 million people will presumably cause the need for more real estate, though that wave hasn't yet manifested. Waits are still long and there are not more doctors. In fact, many doctors are opting for early retirement rather than making the necessary changes to their practice for the ACA or join a massive doctor- or hospital-owned group. Some areas of practice are more efficient due to changes in technology, but the square footage per patient is shrinking—demand is being delivered through the same space. On the other hand, we're navigating away from pay-for-service and migrating toward pay-for-outcomes—if patients are readmitted, they won't get paid, so the focus is on post-acute care and that's where the rehab, nursing and post-acute-care facilities come into play.

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Glen Perkins, executive vice president and managing director of healthcare development at PM Realty Group, agrees on how the ACA is impacting the landscape of healthcare real estate. “ACA has completely changed the dynamics, it's changed the outlook” he says. “We've added 32 million to the ranks of the insured. We've got aging baby boomers and the over-65 crowd is 10 times more likely to develop cancer than any other demographic. They're getting face lifts, elective surgeries. All these things add up.

“Another thing we're seeing with the ACA is uncertainty among physicians,” he adds. “I believe there will be a shortage of physicians in the future—they are disappointed in reimbursements. They are seeing more and more patients and less and less money.

“It used to be that everyone would go on-campus for a procedure, but now the demand is for the outpatient facilities. There are freestanding emergency centers, birthing centers—these places are coming into the communities. We're seeing a lot of adaptive reuse on high-traffic corners where you can often get in at a lower cost—not always a significantly lower cost than a new build, and sometimes even an increased cost. But hospitals will stake their claim either way.”

As far as new construction goes, Perkins says there is a lot of competition for the best and the brightest physicians with a significant 64 million square feet of medical office space required over the next decade. Patients are demanding a more hotel-like atmosphere with ample windows, concierge, coffee bars and even piano players. There are also now more private rooms than ever with patients driving the demand.

Guy Liebler, president of Simone Healthcare, says that the hospital used to be the epicenter of healthcare life—now it's part of a spectrum. Only the most serious of care comes from the hospital and as time goes on, we'll see more and more specialized hospitals.

What we have now, according to Liebler, are practices owned and operated by hospitals or groups of physicians. No longer is the lone doctor's office on the corner. “It is all done in-house with referrals and efficiency lowering cost,” he says. “We can't cut any more dollars out of the system, so we have to change the system. Hospitals have been cutting costs, but you can only do that for so long.

“Healthcare is now becoming a retail business. It's near where you work and live,” he adds. “There is much lower overhead—literally 10% of the price of hospitals. It's a changing industry with the hospital to patient-driven retail model. Just look at all the urgent care facilities in retail centers. It has to be a great location and economically sound.”

One trend Liebler agrees with is the consolidation of hospitals. “They need to be bigger for the economics to work,” he says. “They need the continuum of care model with sub-specialty centers on campus. In order to get the economics right, you have to get the buildings right and efficiently take care of patients—it's a much more sophisticated and strategic model. It's all about getting people into the right buildings.”

Liebler also concurs with the ACA's strain on the system, starting with the number of doctors available to take care of more patients. “We have to act quicker to become more efficient. The government says you can't change the quality of care, so you must become more efficient without lowering the quality of care.

“Everything is just getting bigger. Think of it like interstate banking was 20 years ago. Now everything is the same few banks. This is what is happening,” he adds.

Christopher L. Stai, managing director of Brown Gibbons Lang | Real Estate Partners, says, ”The primary driver that we see influencing the location and utilization of medical office buildings is the unyielding mandate for healthcare providers to reduce costs and increase market share and profitability.” Outpatient facilities are inherently much less expensive to build and operate.”

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Healthcare systems and hospitals continue to look for ways to move or extend services out of the hospital and into communities. With continued advances in healthcare technology, along with physician extenders, such as nurse practitioners and physician assistants, medical office buildings are delivering a wide range of hospital services in a cleaner, lower cost environment. “Today's community-based ambulatory care centers allow patients to conveniently attain the highest quality healthcare from the best health systems, right in their own neighborhood” he states.

Stai also agrees that medical office is the new retail. “While on-campus medical office buildings have historically been preferred by hospitals and investors,” he states, “highly visible and convenient off-campus locations are becoming increasingly more attractive for hospitals and consumers alike.”

Healthcare providers are utilizing a retail strategy that involves bringing healthcare services into the community and broadening the system's geographic outreach to its patient base, providing greater patient engagement, and allowing for higher acuity referrals to the main hospital campus.

“Today, more and more primary care physicians are becoming employed physicians as a result of healthcare reform and ACOs,” says Stai. “With hospital ERs and PCPs operating at or close to full capacity, retail locations, staffed with fewer physicians and more physician extenders, are becoming increasingly more important in managing a community's patient volume with lower acuity and less complex procedures, which could also reduce hospital readmissions and related costs.”

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Kate Morris, first vice president of healthcare services group with CBRE, points out that healthcare is changing daily. “Medical office is doing really well,” she says. “In some cases, there is no space for hospital clients and that translates into great sales. In the 2,000- to 5,000-square-foot range we have seen some vacancies as hospitals are trying to fold primary care physicians into hospital groups. In this game, whoever holds the most primary care physicians wins.”

Morris agrees with the retail assessment. “Women in the family generally do the choosing of the doctor. They are out doing the shopping and they are the ones who see the signage for the physician's office. The key is to be visible. It is more consumer driven,” Morris says. “But the trend is for the care to be out there in the communities. Oncology, surgery—that will still take place in the hospital. But doctors want to be in retail in those large planned communities, in those gated communities.

“We are not seeing as many hospital beds as we are a repurposing of that space,” she notes. “Only the sickest of the sick need to be in the hospital,” says Morris.

Morris sees the pros and cons to the ACA. “People feel like they're losing right now, but they're not,” she asserts. “People who put off knee surgery for a year, or were going to go without it for life, are now getting that knee surgery. There is more volume, and that's tough. We'll see what happens when the subsidies fall off. Physicians are definitely stressed out and not happy.

“So while doctors are joining or creating big physicians groups, a large percentage will retire. You're going to see a lot more nurse practitioners, Walgreen's and Walmart clinics,” says Morris.

Advances in technology are behind the phenomenon of not seeing doctors. A patient with a heart condition might work instead with a nurse practitioner who monitors the patient's weight and blood pressure via phone. “In the past you would have had to go into your doctor for this,” Morris “There are all kinds of monitors that take the place of regular doctors' visits; doctors are now paid to keep you out of the hospital. One thing I know is that there are a lot of people working really hard and the system is trying to do what it can.”