The Headwinds Developers Face Converting Office to Medical

With the uncertainty surrounding the office sector in the future, there is a lot of talk about new uses.

But investors eyeing medical uses will need to keep in mind that office-to-medical transitions face an uphill battle. “It’s really not that easy,” Pete Bulgarelli, president and CEO of Lillibridge Healthcare Services and executive vice president, office, Ventas, said on CBRE’s ‘The Weekly Take’ podcast.

Medical users have different demands.

“The ways that physicians deliver care and utilize their space is much different than traditional office,” says Christopher Bodnar, vice chairman and co-head of healthcare and life sciences capital markets, CBRE.

Electrical capacity changes in medical buildings. So does elevator capacity. “There’s a lot of different components that make up medical office buildings, and it all comes down to best serving the patient,” Bodnar says.

Bulgarelli says investors who evaluate office-to-medical conversions will need to consider things like load factors, slab-to-slab heights and the gases that are in the building. “People talk about it,” he says. “They think it’s simple, but it’s a very difficult thing.”

The medical model is also changing, which has implications for location. In the old days, landlords might have rented more space to independent physicians. Bodnar says the days of the independent physician are dead. With students coming out of school with high levels of debt and enormous medical malpractice insurance costs, they’re more likely to enter medical space through a health system or through a large provider group.

“Those groups are wanting to provide services in a convenient and affordable setting for the patient itself,” Bodnar says. “And that lends it very well to doing off-campus products.”

But he thinks there will also be a need for on-campus products. He points to OB-GYNs.

“Obviously, those physicians can put their services out into the community, away from the campus,” Bodnar says. “But when it comes down to it, those physicians need to make rounds at the hospital. They obviously need to deliver babies. So there will always be a necessity to have those types of practices on campus.”

Also, Bulgarelli says health systems are getting lower reimbursements than they did in the past.  “They have to have a larger collection base in which to capture those patients,” he says

While off-campus medical office buildings are expanding, Bulgarelli points out that they may not be the best investment. He says Ventas’s portfolio is about 70% on-campus or adjacent to campus. “We’re a believer in the on-campus MOBs as an investment,” he says.

Bulgarelli points out that these on-campus facilities are harder to find since there is only so much land in a hospital or adjacent to a hospital campus. He also says there are significant financial benefits for physician groups to do procedures on campus and outpatient facilities.

“That’s a big financial incentive for people to stay on or near campus,” Bulgarelli says.

Finally, Bulgarelli points out that many procedures need to be able to go back and forth to the hospital to check on their patients, admit patients and perform procedures. “We think that in some cases, off-campus MOBs will be excellent investments,” he says. “But in most cases, inpatient or on-campus MOBs will be a very good investment.”