Medical Office Sector Enters Transitional Period


As the trend for health care mergers intensifies, the city’s medical office market evolves, with some private practices consolidating into hospital systems and others relocating to better serve their patients.

Industry insiders believe that as large hospitals buy up smaller practices, it will free up small medical space in the market. Others think that due to the influx of new patients into the medical system under the health care reform, there will be a greater demand for more medical office space.

However it plays out, it is estimated that by 2020, hospital systems will have acquired more than 90 percent of all private practices.

“With the primary care practices that are being acquired, the hospital systems tend to like to have them out in the community closer to the patient base,” said Doug Whitman, executive vice president of corporate finance at Nashville-based Healthcare Realty Trust, a REIT that owns a total of 424,000 square feet of space primarily on or near Baptist Memorial Health Care Corp. campuses in the Mid-South area. “So we aren’t seeing as much movement there, but on the specialist side I think there is a desire to consolidate and bring them in closer to the hospitals.”

One example of Whitman’s point is Integrity Oncology, which aligned with the Baptist Memorial system last year. Integrity plans to move its Briarcrest office in East Memphis into Baptist’s new $65 million comprehensive cancer treatment center planned to be built by 2015.

Whitman describes Memphis as one of Healthcare Realty’s stronger markets, with occupancy rates at its properties hovering between 85 percent and 95 percent. Cap rates are generally stable now compared to the recession years of 2008 and 2009.

“The medical office sector is not recession-proof, but it’s more resistant than other sectors,” he said. “It isn’t boom and bust. When the economy is great, medical office doesn’t take off, but, conversely, when the economy goes poorly, medical office generally does better than other areas.”

Recently HRT of Tennessee Inc., an affiliate of Healthcare Reality, added to the REIT’s Memphis portfolio with the acquisition of a 40,592 square foot building for slightly less than $11 million at 8040 Wolf River Blvd. near Baptist’s East Memphis campus. The building is 100 percent leased with three medical tenants.

The largest lease in the Memphis office market for the third quarter involved Baptist Medical Group’s leasing 14,500 square feet at 965 Ridge Lake Blvd. in Boyle Investment Co.’s Ridgeway Center. Baptist plans to consolidate three of its administrative offices into the new location, which will be ready for move-in by mid-November.

The lease helped fuel overall net absorption of 53,981 square feet for the Memphis office market in Q3, according to CB Richard Ellis’ third quarter Memphis Office MarketView report. The deal also helped drop the area’s overall vacancy rate to 14.2 percent from 15.1 percent.

“Overall, activity in health care real estate has been very positive for the local real estate market,” said Kelly Truitt, principal broker and president of CB Richard Ellis Memphis. “It’s providing net absorption, and it’s providing jobs for construction and different trades and suppliers.”

Truitt sees two trends happening. First, non-clinical administrative spaces are being moved away from hospital campuses and out into the office market to free up important space on the campuses for clinical use.

“As some practices have been acquired, some of the location strategies have been analyzed to focus on more strategic and accessible locations to make it easier for patients,” he said. “So we are seeing some users move into more visible and accessible medical office and quasi-retail locations.”

At the Germantown Village Square property across from Methodist Hospital, Boyle is in the process of adapting the second-floor office space for medical use to accommodate a need for more medical space near the hospital.

“The medical office market is in a state of transition as many private practices align with hospital groups,” said Mark Halperin, executive vice president with Boyle Investments. “We are seeing movement with medical groups to be centrally located to all of the hospitals so they can better serve all of them. At Germantown Village Square, the retail portion (on the first floor) is really strong, and we think the second floor space for medical use will really complement the retail.”

In addition to Baptist’s proposed cancer treatment center, more new medical office space is possibly on the horizon in East Memphis near the Baptist Memphis campus, as two new projects are rumored to be in the early stages of development from Landstone Medical Properties LLC and Ford Jarratt Realty & Development LLC.