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Construction Costs Having Developers Shoulder More Healthcare Real Estate Costs

As construction prices have spiked, many businesses have responded by cramming more employees into less space with open floor plans, coworking and the reduction or outright elimination of private offices.

Physicians are receiving sticker shock from construction prices.

But those methods to help reduce construction tabs are more elusive when it comes to medical office space.

“Healthcare is a more highly demised space than any other category. Way more than office, and especially office now,” MB Real Estate Vice President Brian Burks said. “You still need your exam rooms, your waiting rooms, your back office, your nurses stations.”

As healthcare demand accelerates — especially as baby boomers require more medical attention and care — efforts by healthcare systems and medical practices to expand are being met with larger construction tabs.

Costs to build out medical office practices have jumped at least 20% in the past two years, said Burks, who will be a panelist at Bisnow's Atlanta State of Healthcare event May 8.

“It used to be $60/SF on a 10-year deal,” he said. "Now in order to build it out, you're in the $80 to $90 [per SF range] for the kind of standard building finish."

For smaller medical practices, especially those looking to capture more patients by expanding the number of offices, these costs can be hard to swallow, Ackerman & Co. President Kris Miller said.

“A practice that previously would have funded, say, $15 a [square] foot, now they're funding $30,” Miller said. "They really don't have the ability, on average, to do that."

Ackerman & Co. President Kris Miller

That has Ackerman and other firms helping pick up the tab on the capital costs of building out medical office space for clients. In exchange, physician groups are agreeing to longer lease terms or higher tenant improvement allowances that are paid back over the life of a lease. Occasionally, physicians are even investing equity into their own real estate deals.

Smaller practices may be staying put instead of moving, Caddis Healthcare Real Estate Director Christine Gorham said. These practices may be handcuffed as well by larger healthcare trends, such as shrinking reimbursements.

“Most folks we are seeing are not doing complete re-dos,” Gorham said. "They're doing more a refresh."

Miller said many practices are needing to grow their real estate anyway in order to push business forward, whether with expanding existing offices or establishing new ones.

Issues with reimbursements are less a problem over losing patients to other expanding practices. After all, a change of, say, $20 in a reimbursement is not nearly as impacting on a practice as the loss of two visits a day, Miller said.

Being able to see more patients, or establishing a new office in a community with strong demographics, will do much more in the long run, Miller said.

“At the end of the day, pressure on reimbursement is certainly not a good thing for physician practices, but it's still a volume business,” he added. “Real estate is fundamentally very much part of a doctor's business. A well-designed space affects how many patients [they] can see in an hour.”

Hear more from Burks, Miller and Gorham, along with a host of other commercial real estate professionals at Bisnow's Atlanta State of Healthcare, 7:30 a.m., Wednesday, May 8, at the InterContinental Buckhead Atlanta.