OC Healthcare's Hot and Bothered (by Costs and Regs)

With higher occupancies and increasing demand, times have never been better for healthcare real estate in Orange County—or more challenging for developers and operators, considering the turmoil in the industry.

First the good news: Healthcare property fundamentals are strong, with vacancies at about 11%, or 100 basis points lower than a year ago, according to speakers at Bisnow's 4th annual Orange County Healthcare Summit last week. About 300k SF of new projects is underway for delivery this year and next, with more on the drawing boards. Investors are keen for healthcare properties as well, even though cap rates are in the low 5s for Class-A buildings. Nationwide, for example, REITs have allocated $15.5B for healthcare real estate acquisition this year, up 91% from 2014. Snapped: Edwards Lifesciences VP Tom Porter, DPR Construction director Ron Rendina, one of our moderators, and Hoag Memorial Hospital Presbyterian SVP Sandy Smith.

Healthcare systems are eager to build new space to accommodate growing demand (such as the 64k SF Newport Heights Medical Campus developed by Real Estate Development Associates, pictured, to get underway this summer), and to replace obsolete space. But since healthcare space isn't simple to build, health systems are demanding a team approach to getting projects done, the speakers noted. That is, the developer, contractor, architect and other key players joining forces to do a full turnkey solution. Clients don't want to do new space piecemeal anymore.

Here's Kaiser Permanente executive director Sunil Shah and St. Joseph Health COO Jeremy Zoch. The speakers said there's more demand now for larger healthcare spaces because of consolidation among physician groups; and yet, there's also less space per doctor. It used to be as much as 1,500 SF/doc, and now it's as little as 1,200 SF or even 1k SF. In short, there are more physicians in less space, as healthcare systems and physician groups consolidate and grow.

Many physicians want to be part of large systems, the panelists explained. Their provision of healthcare is often crimped by the details of the business of healthcare—dealing with insurers, complying with government regulations, and managing office and clinical space. So they want to be part of larger systems to handle all that. Here's CBRE senior associate Christopher Isola, Pacific Medical Buildings SVP Jake Rohe and DBaC's Bruce Asper.

The growth areas for healthcare development in OC (and pretty much everywhere in this country) will continue to be outpatient care and higher-end MOBs, our speakers predicted. As the pressures increase on health systems to cut costs, and yet the demand for care rises, even more care will be delivered in outpatient, ambulatory settings. Hospital beds will be only for those patients who need them very badly. Improvements in outpatient care technology and more patient-friendly space design will facilitate the continuing shift to outpatient care. Here's Lionakis principal Scott Mackey, who also moderated, and Taylor Design president Randy Regier.

Well-to-do patients are becoming more demanding, and that's going to drive more demand for high-end MOBs, with better amenities and finishes—just as you'd find in other kinds of real estate, our speakers said. New developments will be able to deliver this kind of space more easily than redeveloped older MOBs, but in some cases the existing MOBs will have locational advantages that make upgrading their space a worthwhile investment.