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Why Medical Office Buildings May Find Themselves On Life Support

An oversupply of medical office buildings—the gold standard of commercial tenants—could cause a real estate fatality.

By Jeff Vasishta April 3, 2017

Ever wondered why commercial landlords break into their happy dance when their broker tells them they’ve just secured a medical office as a tenant? According to Pew Research Center, 10,000 baby boomers a day will turn 65 for the next 14 years. By 2030, 18 percent of the country will be 65 and older, and per-capita healthcare expenditures are on the rise. That’s about as steady as rent can get, right?

At least that was the common thinking. Perhaps a little too common as it turns out. Remarkably, there threaten to be more medical offices than people needing medical treatment and the whole sector may wind up on life support. Did anyone say bubble?

Supply and demand causes any bubble and commercial landlords have been overdosing on MOB’s (medical office buildings), to the tune of a 25 percent increase from 2015-2016, to 22.7 million square feet, according to a report by Colliers. And it’s still rising. Another 20 million square feet of MOB is expected to open in 2017.  It “has the potential to generate more than 1,400 new healthcare properties, 46 percent of which are MOBs,” says the Colliers report.

RelatedShrinking Offices Space Leads To Opportunities For Innovation

Blame those pesky millennials. They currently rival the Baby Boomer population with roughly 76 million in the US. And the thing about millennials is that they tend to be young and invariably healthy, so if the new plethora of new MOB’s are hoping to book some of them as patients, there’ll be a lot of secretary’s playing Candy Crush Saga on their phones instead of booking appointments.

Technology is also like to be a major disruptor, with patients increasingly able to book appointments with their doctors over the internet and consult via Skype or Face Time.

“At some point in time, what you start looking at is: When does that population growth, that bell curve, start down?” David Park, who oversees construction for one of the 20 largest healthcare delivery networks in the US told Forbes. ”At some point, that number is going to drop.”

RelatedHow The Offices Of The Future Will Do Wonders For Your Health

Still, with the Affordable Care Act set to continue for the foreseeable future and as of 2016, an average American’s healthcare costs rising to $10,000 per year and expected to grow 5.8 percent a year through 2025, according to Colliers International, it’s hard to bet against healthcare. The main question appears to be will MOB’s still be the place patients want to go to get seen to. Along with online care, MOB’s now face another potential threat—shopping malls. The Wall Street Journal reported that retail malls, feeling the effect of Amazon and online shopping, have made it their business to try an attract medical practices as potential patients seek Urgent Care type facilities instead of heading to the hospital or a larger medical office.

“Instead of hiding them in a medical office complex, we’re transitioning to better locations so that the community is more aware of them,” said Jacob Niebrugge, vice president of development at Heartland Dental LLC. “It’s all about exposure for the doctors and their teams.”

The Journal reported that Heartland Dental, which provides business and practice-management services to dentists, supports 775 clinics across 34 states. It stopped opening new clinics in medical office buildings in 2011, and plans to open 36 this year in retail centers. Attracting foot traffic from the mall is a big draw. After all, where else can a doctor advise a patient to exercise more and then direct them over to the store to buy a new pair of running shoes?

Jeff Vasishta

ABOUT THE AUTHOR Jeff Vasishta

ABOUT THE AUTHOR Jeff Vasishta

Jeff is a writer, husband and father but not necessarily in that order. As a music journalist he counts Prince, Beyonce and Quincy Jones amongst those he’s interviewed. He's also owned and flipped homes in Brooklyn, NJ, CT and PA.

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