Put Your Money Where the Boom Will Be: Medical Facilities

A few facts: We live in an area that has excellent regional medical facilities. As our population base continues to grow, we can anticipate the growth of the medical profession and medical facilities in the area. According to the Northwest Michigan Council of Governments it is anticipated that healthcare-related employment, which is the area's second largest employment industry, will continue to expand by 8.9 percent over the next three years.

And, as with any expansion, a major infusion of capital will be required. Translation: The growth of the medical profession will have a major impact on real estate investment in the coming years, as well as on the construction industry and the building trades.

According to national real estate publications, outpatient medical facilities provide investors with great opportunities for reliable returns. Some studies indicate that most hospital systems today provide 60 percent of their treatments on an inpatient basis and 40 percent as ambulatory care, or outpatient treatments. But that ratio is changing. Many believe that over the next five years, those percentages are going to be reversed. The demand for outpatient services and buildings where those services are offered will mushroom as the large population of Baby Boomers age and require more medical attention and treatments.

Another factor? Now that the health care reform has been signed into law, the medical industry has gained a sense of certainty regarding the need to expand. A real estate formula for calculating medical space indicates that a health care system requires about 1.9 square feet of medical office space per patient. With healthcare reform imminent, it is estimated that 32 million people will be added to the ranks of the insured. That equates to a potential demand for 64 million square feet of additional medical space.

The trend in the medical profession, as with many industries, is to cluster services that are interdependent, and to ideally provide facilities for ancillary businesses, suppliers and supporting professions. Some major medical campuses, in fact, have planned space for physical therapy, pharmacies, banking and restaurants. It is also conceivable that residential units would need to be available for short-term occupancy for families of patients and healthcare related employees.

A quick search of the Traverse Area Association of Realtors MLS reveals this inventory of available Medical/Dental space in the five-county area: "For Sale," approximately 385,000 square feet; "For Lease," 110,000 square feet. A survey of the medical facilities in our area suggests that many facilities for doctors and the support services have become functionally obsolescent. These facilities are older buildings that have been developed on an as-needed basis over several years, making it difficult to accommodate supporting medical businesses.

It is expected that the successful development of new medical/office campuses will offer flexibility of design for the user of the buildings. What to look for: space that can be easily reconfigured to accommodate expansion and contraction of specific suites, state of the art heating and air conditioning, and alternative sources of electrical service in case of power outages.

While demand for facilities will increase, investor criteria for health care facilities may not experience drastic change. Nevertheless investing in medical service and office developments may very well be part of an investment strategy that will provide solid returns in into the future, both nationally and in northern Michigan.

The prudent investment? To invest in existing medical properties that have some vacancy and are conducive to being renovated and upgraded to accommodate the new type of medical facility. The anticipated increased demand will fill the vacancy and foster additional tenant demand, ensuring a successful investment.

Tornga, CPM, a principal and associate broker with Traverse City's ThreeWest commercial real estate, is a Certified Property Manager and Licensed Real?Estate Broker. 231-929-2955, stornga@threewest.net.