Recovery and Transition

The economy is not only going through (or suffering through? – it seems like it sometimes) a recovery after a rather rough recession/depression/panic, it is also going through a transition that started with the invention of the World Wide Web, or really, with the invention of the computer itself. In truth, economies are almost always going through some sort of transition – innovations do not stop or start, but always seem to be trickling in. Computers and the internet, though, just like steam before them, are putting the global economy through a much larger transition than we might be used to. The effects are happening slowly; it takes time to find the next market efficiency, and most new market efficiencies are resisted by the existing major players and the congressmen they employ. But happening they are, and happen they will and your best bet is to get on board sooner rather than later.

Efficiency really is the name of the game. It is the reason capitalism, with its focus on competition, beats mercantilism (i.e. crony capitalism) and socialism. Efficiency in this regard means cutting costs – getting the most for the least – and commercial real estate is a great place to make those cuts. For one thing, values were forced to reset after the Great Recession. But more importantly, computers and the internet continue to change the way people work. Office tenants have been trending towards less office space per worker. Computers are only getting smaller, and smart phones and broadband allow more workers to be productive away from the office. So even when office firms are hiring and signing leases, it’s likely that they’ll be taking smaller spaces, relatively, than they did in the past, and this extends the time it will take for the office market to fully recover.

Medical office has been going through a similar transition. The day of the artisan doctor – one man in one office with his own receptionist and assistants – is over, and the new era of medical groups has arrived. Doctors become salaried employees who are not on call 24 hours a day, 7 days a week, several doctors share a receptionist and office staff, and ultimately take less medical office space per employee than they would have in the past. The reason for this transition is the screwed up world of health insurance and government regulations, of course, not technology, but it’s a transition just the same, and one that brokers should pay attention to. Moreover, healthcare providers are moving into retail centers to get closer to customers and, more importantly, to probably pay less for rent.

Retail has other problems though, in the form of online retail. Shopping online doesn’t cost more, and it’s often more convenient (two generations of rampant narcissism has done nothing to make the shopping experience more pleasant), so it’s on the rise. More online sales means less demand for physical retail real estate – witness mass closures of Staples and Radio Shack, and shrinking retail concepts from grocery to electronics.

The big winner in all this might be industrial space. If the trend is towards spending less on commercial real estate, industrial product, which tends to be less expensive than either retail or office space, becomes an option. This is particularly true when it comes to online retailers. While they do not need physical retail space, they do need physical warehouse space, and giants like Amazon appear to be aiming to have warehouse space in every major and minor city in the country to allow them to ship to their customers, and accept returns from their customers, as quickly as possible.

The slow post-Great Recession recovery is not just slow because it’s slow, it’s slow because businesses are forging a brand new identity and are finding brand new ways to do business. Commercial real estate will adapt to this transition, but only if real estate professionals recognize it. Those who do will likely reap the reward of being ahead of the competition.

Moving Targets

Are traditional doctors offices going the way of house calls?

Think of the economy – any economy – as a river. A river is just water that is moving from a higher elevation to a lower elevation. If anything gets in its way, the water moves around it or, eventually, through it. There’s no thought process involved, or the act of a higher power. Water is driven by gravity to be as low as it can be.

Economies are likewise driven to be efficient. Producing the most possible at the lowest price. Why? Because human beings demand it. There is almost no end to what human beings want, and therefore producers want to produce as much of something as they can, and consumers, who have so many desires, want to pay as little as possible. Ultimately, the marketplace is where consumers and producers meet in the middle.

Human beings can erect dams to manipulate the flow of water. Note that I said manipulate, not stop. The water cannot be stopped. Hoover Dam forces water through channels to spin dynamos, but it doesn’t stop the water from flowing. Other dams force the water into fields to irrigate crops, but they do not stop the water.

Likewise, human governments can erect regulations, taxes and other such things to manipulate the flow of an economy. They can make something artificially cheap or expensive, but eventually the market will, by hook or by crook, work around those artifices to put the product at the market price.

I’ve recently read an article about innovations in healthcare. The supply of healthcare is, like a river, finding a way around artificial impediments. Because the old way of delivering healthcare, via individual doctors and surgeons, has been made artificially expensive with cost-sharing "health insurance”, producers and consumers are finding a way to “meet in the middle” with medical groups, do-it-yourself treatment aided by handheld computers (let’s stop calling them cell phones – they’re really so much more), health clinics, etc.

At the moment, the victim of this market-driven innovation is medical office space. Medical office space was designed to serve the old market of doctors and patients. At the moment, it is being negatively impacted by the change in healthcare delivery – a change initiated not by the free market, but by large public and private institutions.

Will we, at some point, return to a more traditional model? Perhaps. As healthcare delivery moves away from the very institutions that sought to dominate it, they will have to adapt or die. In the meantime, medical office will have to adapt to the new way of doing things. It may do this by clever redesigns to serve medical groups and health clinics, or by repurposing itself to other uses. Thus the ebb and flow of commerce continues. Keep this in mind when dealing with developers and building owners. The consumer (in this case potential tenant or buyer) is always a moving target, and forces much larger than they are driving that movement. Spend some time understanding the macro-economy to better understand the micro-economies you deal with when you represent a landlord or tenant.

JMS

What Lies Ahead for Medical Office?

After a strong third quarter, medical office fell back into negative net absorption in the fourth quarter of 2012. For the year as a whole, medical office returned 61,723 square feet to the market, net, despite a steady increase in health care oriented employment. Why such a discrepancy between jobs and net absorption? Health care in the United States, and the medical practitioners who deliver it and occupy medical office space, are going through a transition period. Not only are the days of private practice falling to the rise of medical groups, who require less space to do the same work, but the need for efficiency and lower prices are shifting medical resources from the traditional medical office buildings (MOB’s) of the past to new concepts that often take space in retail centers to be closer to their patients. The times are changing for medical office.

The rise of medical groups, such as Accountable Care Organizations (ACO’s), and alternative vectors of providing healthcare are putting the squeeze on medical office right now. Doctors, insurers and patients are all going through a slow discovery process of just what the Affordable Care Act means to them, and doctors and insurers are especially trying to come to grips with what these government-mandated changes will mean to their business models. Owners of medical space also need to come to grips with the changes that are on the horizon for medical care. With group practices and urgent care facilities set to dominate healthcare delivery in the future, medical office buildings will need to be retro-fitted to accommodate these tenants, and that requires a capital investment. With margins likely tightening, passing these tenant improvements on to the tenants will be tricky.

The uneven application of “Obamacare”, compounded by balking among members of the president’s own party regarding associated taxes, should insure a bumpy road for medical office over at least the next four years. More importantly, while the government-medical complex is working out the kinks, private enterprise will continue to innovate in the health care arena. From Wal-Mart’s foray into small pharmacies on medical campuses to health care in Targets, more and more medical office dollars are going to flow into non-medical real estate, putting the crunch on landlords already dealing with consolidations and downsizing among physicians. We think we will continue to see the medical office market bounce along the bottom in 2013 while medical office users survey the new medical landscape and prepare for the future.

Colliers International Q4-2012 Report