Collie

1. 2014 OUTLOOK | MEDICAL OFFICE
UNITED STATES
HIGHLIGHTS
Medical Office Trends
and 2014 Outlook
ANDREA CROSS National Office Research Manager
KEY TAKEAWAYS
UNITED STATES MARKET STATS
YEAR-END
2013
2012
2011
U.S. healthcare
employment average
annual growth
1.9%
2.0%
1.8%
FIRST HALF*
2013
2012
2011
12.26%
12.25%
12.56%
Overall vacancy rate
Leasing activity 4.54 MSF 4.76 MSF 4.73 MSF
Absorption 1.56 MSF 2.52 MSF 1.41 MSF
Asking rent PSF
(weighted avgerage)
Construction
completions
$23.79
$23.80
$23.82
• Drivers of health care demand: In the short term, an additional 32 million people insured by the
Affordable Care Act (ACA); long term, more than 20% of the U.S. population will be 65 or older
by 2029.
• ACA regulations mean more consolidation among health care providers and insurers, further
tilting medical office demand to large companies.
• Medical office accounts for 25% of all U.S. office space under construction. Construction has
decreased significantly since the recession: 1.8 MSF in 1H 2013 vs. 8.4 MSF in 1H 2009 (markets
tracked by Colliers).
• Decrease in construction is attributable to conversion of non-traditional properties, especially big
box retail and suburban shopping centers, and uncertainly regarding impact of ACA on health
care delivery mechanisms.
• Investment: $2.47B of medical office transactions in Q4 2013 was highest since Q4 2006,
exceeding even the Q4 2012 surge prior to 2013 tax increases. 2014 should be a strong year,
given scarcity of properties, availability of capital, and opportunities in secondary/tertiary markets.
1.01 MSF 2.61 MSF 1.53 MSF
Square footage
1.82 MSF 4.19 MSF 5.76 MSF
under construction
*In 32 surveyed Colliers markets
INVESTMENT STATS
YEAR-END
2013
2012
2011
MOB transaction
volume
$7.17B
$6.66B
$5.76B
FOURTH QUARTER
2013
2012
2011
Average price
paid PSF
$225
$208
$198
Average cap rate
7.40%
7.72%
7.79%
SOURCES: Bureau of Labor Statistics, Real
Capital Analytics, Colliers International
www.colliers.com
SOURCE: Bebeto Matthews/AP

2. HIGHLIGHTS | 2014 OUTLOOK | MEDICAL OFFICE | UNITED STATES
Health Care Trends
The U.S. health care industry is undergoing a seismic shift due to longterm changes in demographics, and near-term structural and policy changes. Compounding the long-anticipated surge in demand for health care services from the aging baby boomer population, the passage of the Affordable
Care Act (ACA) is expected to add 32 million to the ranks of the insured.
At the same time, implementation of ACA regulations concerning patient
care, cost control, electronic recordkeeping, etc., will fundamentally alter
the business models of health care providers of all sizes.
ANNUAL PHYSICIAN OFFICE VISITS BY AGE | PER 100 PEOPLE
700
600
500
400
300
DEMOGRAPHICS
During the next ten years, the population aged 65 and over is projected to
increase an average of 3.3% per year, resulting in an increase of nearly
17 million people in this cohort by 2023. (By comparison, total population growth during the same period is projected to average only 0.8%.)
By 2029, the 65+ age cohort will account for more than 20% of the U.S.
population, up from 13.7% in 2012.
200
100
0
Under 15 years
15-24
25-44
45-64
65-74
75+
SOURCE: CDC, 2010 National Ambulatory Medical Care Survey
U.S. POPULATION 65 YEARS AND OLDER
IMPACT OF ACA: CONSOLIDATION, DISRUPTION
25%
80
70
20%
60
50
15%
40
10%
30
20
5%
10
30
20
28
20
26
20
24
20
22
20
Pop 65+ (Mil.)
20
20
18
16
20
20
20
20
14
0%
12
0
65+ % of Total Pop
SOURCE: U.S. Census Bureau
With the delay of the employer mandate and the troubled launch of the
Health Insurance Marketplace website (healthcare.gov), the timing of the
ACA rollout is unclear. However, its impact on the health care industry and
real estate market will be profound—and not just in terms of an additional
32 million insured individuals upon implementation. The ACA also aims to
rein in health care costs and improve the quality of care through a variety
of measures that will fundamentally change the industry.
U.S. health care spending is by far the highest in the world, about 50%
higher on a per-capita basis than second-ranked Norway. Also, health care
spending as a percentage of GDP increased significantly during the last
60 years, to nearly 18% in 2009. (The percentage was flat between 2009
HEALTH CARE JOBS AS SHARE OF TOTAL WORKFORCE | LARGE METROS
This growth will translate into a substantial increase in demand for medical
services, due to the greater need for health care among the older age cohorts:
The annual number of physician office visits per 100 people in the 65–74
year-old cohort is nearly 70% higher than in the 45–64 year-old cohort.
25%
Demand for health care will likely remain strong across geographic locations. Northeast and Midwest metro areas tend to have above-average concentrations of health care workers because of their relatively older populations, who demand greater amounts of care. However, Sunbelt cities in
the South and West dominate the list of fastest-growing metro areas for
health care employment, supported by above-average population growth.
In-migration to Sunbelt metro areas should increase further as job prospects in these areas improve and the recovering housing market enables
greater household mobility in the United States. With large, in-place senior
populations in the Northeast and Midwest, and rapid population growth in
the Sunbelt, demand for medical office space should increase across a
broad range of geographies.
10%
P. 2
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21.9%
20%
15%
18.1% 17.8%
17.1% 17.1% 16.7% 16.6% 16.4% 16.3% 16.3%
12.7%
5%
Du
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am
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M
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ha
TX
pe
lH
ill,
Ne
NC
w
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ve
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or
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er
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w
n,
ra
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nt
ov
on
id
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es
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ar
re
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PA
ev
ela
nd
Ph
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ila
H
de
lph
UN
ia,
IT
PA
ED
ST
AT
ES
0%
SOURCE: EMSI 2013.3 Class of Worker data.
Includes QCEW Employees, Non-QCEW Employees & Self-Employed

3. HIGHLIGHTS | 2014 OUTLOOK | MEDICAL OFFICE | UNITED STATES
FASTEST-GROWING METROS FOR HEALTH CARE &
SOCIAL ASSISTANCE EMPLOYMENT
MSA
2012 JOBS
2013 JOBS
80,073
84,658
21.9%
309,332
325,411
18.1%
39,116
40,953
17.8%
Grand Rapids, MI
56,336
58,801
17.1%
Las Vegas, NV
75,041
78,288
17.1%
Knoxville, TN
46,322
48,238
16.7%
Virginia Beach, VA
89,627
93,312
16.6%
Nashville, TN
111,969
116,567
16.4%
Atlanta, GA
242,277
252,179
16.3%
Austin, TX
86,429
89,939
16.3%
El Paso, TX
39,570
41,170
12.7%
Richmond, VA
Houston, TX
Boise, ID
% CHANGE
SOURCE: EMSI 2013.3 Class of Worker data.
Includes QCEW Employees, Non-QCEW Employees & Self-Employed
20%
16%
14%
12%
12.5
10%
8%
13.8 14.5
16.2 16.4 16.8
15.4 15.9 16.0 16.1
17.9 17.9 17.9
9.2
6%
7.2
5.2
4%
2%
0%
0
6
19
70 980 990 000 001 002 003 004 005 006 007 008 009 010 011
2
1
1
2
2
2
2
2
2
2
2
2
2
2
19
SOURCE: Center for Medicare & Medicaid Services
HEALTH EXPENDITURES PER CAPITA
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
S ay nd ds ia da ny ark rg ce um en lia nd om nd 34
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la D
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e
TA No itze her Au Ca erm en emb Fr Bel Sw us Ir King Fin EC
S
A
G D x
O
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d
D
Sw Ne
Lu
ite
TE
NI
Un
U
Note: Data is for 2011 or most recent available year
SOURCE: OECD Health Statistics 2013; WHO Global Health Expenditure Database
The ACO component of the law is rapidly accelerating the consolidation
trend in the health care industry, as larger hospital systems are better
positioned to handle the scale, complexity and capital costs of establishing
and maintaining these networks. Larger hospital systems also benefit from
greater negotiating power with insurance companies. Although still well
below peak deal volumes during the last hospital mergers and acquisitions
(M&A) boom in the late 1990s, 105 M&A deals occurred in 2012, more than
double the annual average of 55 between 2005 and 2009. Booz & Company estimates that 1,000 of the 5,000 hospitals in the U.S. could attempt
to merge with another hospital during the next five to seven years.
Recent large transactions included:
NATIONAL HEALTH EXPENDITURES AS A PERCENT OF GDP
18%
and 2011, largely attributable to the recession and increased generic pharmaceutical sales due to patent expirations.) In just ten years, the average
cost of a hospital stay increased by 90%, according to the Health Industry
Distributors Association, reaching more than $33,000 in 2010 due to higher
premiums, increased technology costs and greater consumer usage of laboratory tests. One way the law seeks to reduce costs is the introduction of
Accountable Care Organizations (ACOs), which are intended to improve patient care through better communication and coordination among providers,
offering financial incentives for successful, lower-cost outcomes.
• Mount Sinai Medical Center’s merger with Continuum Health Partners,
owner of Beth Israel Medical Center, St. Luke’s and Roosevelt
Hospitals, and New York Eye and Ear Infirmary, completed in
September 2013; the combined system will have approximately 36,000
employees (including 6,600 physicians), 3,500 hospital beds, and
200,000 inpatient admissions and 2.5 million outpatient visits annually;
• Completed in October 2013, Dallas-based Tenet Healthcare’s
acquisition of Nashville-based Vanguard Health Systems for $4.3
billion; the expanded company employs more than 100,000 people and
operates 173 outpatient centers, 77 acute care hospitals, five health
plans and six ACOs;
• Community Health Systems of Tennessee’s recent acquisition of
Florida-based Health Management Associates for $7.6 billion; the
company now totals 206 hospitals and approximately 27,000
physicians.
HOSPITAL MERGERS & ACQUISITIONS
120
100
67
52
80
40
60
40
16
38
22
38
34
22
20
0
34
32
22
2005
2006
22
16
2007
2008
2009
For-Profit Buyers
36
41
38
24
2010
2011
2012
2013*
Nonprofit Buyers
*Year to date, August 2013
SOURCE: Irving Levin Associates
COLLIERS INTERNATIONAL |
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4. HIGHLIGHTS | 2014 OUTLOOK | MEDICAL OFFICE | UNITED STATES
PHYSICIANS BY EMPLOYMENT STATUS
500,000
400,000
300,000
200,000
100,000
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
*
0
Estimated count of independent physicians
Estimated count of Healthcare System-employed physicians
*Projected
SOURCE: AMA, Accenture, Becker’s Hospital Review
Cost pressures also are spurring alliances and affiliations between health
care systems, even competitors. Southern California health care titans
UCLA Health System and Cedars-Sinai Medical Center recently signed a
15-year lease at the former general care Century City Hospital in Los Angeles, which has been vacant since 2008. In partnership with Select Medical
Holdings Corporation, a Pennsylvania-based rehabilitation facility operator,
they will open a 138-bed state-of-the-art acute rehabilitation hospital in
2015, following extensive renovations to the 170,000 square-foot facility.
Other recent examples include two partnerships in North Carolina: UNC
Health Care’s assumption of operations management for non-profit Nash
Health Care; and Duke LifePoint, a joint venture between Duke Health and
LifePoint Hospitals. The trends of consolidation and strategic alliances—
particularly for smaller community hospitals—will likely continue with the
implementation of the ACA and its associated challenges.
Another significant trend is the integration of large health care providers
with insurance companies. Alignment of provider and insurer interests creates greater incentive for successful patient outcomes without prescribing
excessive tests and treatments, thus containing costs while providing highquality care. Examples of these integrated systems include UnitedHealth,
Kaiser Permanente and HealthPartners. Health systems also are forging
alliances with insurers to create fully integrated systems to boost provider
collaboration, improve outcomes and lower costs, such as Blue Cross’s
Aligned Incentives Contracts program. Ten large health systems are participating in the program, including Allina Integrated Medical Network, which
announced the creation of BluePoint, a new integrated health plan with
Blue Cross Blue Shield of Minnesota, in August 2013.
Smaller physician practices are being acquired and folded into larger health
care systems due to cost pressures and uncertainties regarding the implementation and effect of the ACA. The percentage of independent practicing
physicians has declined from 57% in 2000 to a projected 36% in 2013.
According to an Accenture survey, the greatest concerns facing physicians
were business expenses (87%), the prevalence of managed care (61%) and
maintenance of electronic health record (EHR) requirements (53%). Also
driving this trend is a projected physician shortage, prompting health care
systems to acquire independent physician practices.
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20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
90%
78.4%
71.8%
80%
70%
57.0%
60%
48.3% 51.0%
48.1%
42.0%
50%
39.6%
34.8%
33.9%
40%
29.2%
27.9%
23.9%
21.8%
30%
20.8%
16.9%
18.2% 17.3% 17.3%
20%
10.5% 11.8%
10%
0%
600,000
P. 4
U.S. OFFICE-BASED PHYSICIANS WITH EMR/EHR SYSTEMS (%)
Any EMR/EHR system
Basic system
Note: “Any EMR/EHR system” is a medical or health record system that is all or partially electronic
(excluding billing systems); “Basic system” meets certain functionalities
SOURCE: CDC, NCHS Data Brief #143, January 2014
Many office-based physicians seek to implement EHR systems in order to
reap financial incentives from Medicare and Medicaid. Created as part of
the American Recovery and Reinvestment Act (ARRA) of 2009, the Health
Information Technology for Economic and Clinical Health (HITECH) Act
includes incentive programs that reward participants who demonstrate
“meaningful use” of EHR systems that meet certain criteria. Participants
must meet the specific objectives of each of the three stages of the programs, focused on the creation of electronic health information (Stage 1),
the exchange of this information (Stage 2), and the use of this information
to improve patient outcomes (Stage 3). Payments to providers meeting
Stage 1 criteria began in 2011, and Stage 2 payments will begin in 2014.
In addition, Medicare and Medicaid providers that do not meet the program
requirements will be subject to financial penalties beginning in 2015.
Although adoption of EHR systems continues to grow, the percentage of
physicians with systems that meet the criteria for Stage 2 incentives is low.
According to the National Center for Health Statistics (NCHS), the percentages of office-based physicians with any EHR system or a basic EHR system have been trending upward since 2006. However, among physicians
that plan to participate in the Medicare or Medicaid incentive programs, just
13% have a system that can handle 14 of the 17 Stage 2 core objectives,
according to the most recent survey. Furthermore, this understates the
percentage of providers capable of meeting the Stage 2 requirements, as
the HITECH incentive program requires that providers meet all 17 core objectives, as well as three out of six additional “menu” objectives. The ability
of physicians to meet the requirements of the HITECH program will be a
key trend to monitor, potentially contributing to a continued increase in the
share of hospital-employed physicians given the difficult of implementing
qualified EHR systems independently.
Technological developments also are transforming the health care landscape and driving the consolidation trend. Improvements in, increased patient comfort with, and the cost-effectiveness of medical technology practices are expected to drive increasing demand for telehealth and mobile
health (mHealth) systems, ranging from online appointment scheduling to
remote patient data collection and monitoring. With the ACA emphasizing cost containment, interest in lower-cost delivery mechanisms such as

5. HIGHLIGHTS | 2014 OUTLOOK | MEDICAL OFFICE | UNITED STATES
these will likely increase. Again, large organizations with the capital to invest in these technologies and deploy them across a range of facilities and
specialties are well-positioned to capitalize on this trend.
This consolidation trend is likely to continue, and has significant implications for the medical office market, both in terms of leasing activity and
construction of new facilities. The shift to the ACO model will likely result
in a continued increase in the number of hospital-employed physicians due
to the cost of running these programs, which will favor large organizations
that benefit from economies of scale. This will contribute to stronger tenant demand from large heath care systems rather than small physician
practices.
MEDICAL OFFICE VS. TRADITIONAL OFFICE
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
1H09
1H10
CBD
Medical Office Market
Colliers’ medical office data includes on-campus, offcampus, single- and multi-tenant medical office buildings
totaling 10,000 square feet or more, as well as office
buildings in which medical tenants occupy 50% or more of
the space. Our coverage universe includes 39 U.S. markets
encompassing approximately 337 million square feet of
medical office space. Our historical time series, beginning in
2009, includes 32 U.S. markets totaling 304 million square
feet. As we build our inventory database, we will add
markets to future iterations of this report.
2H09
2H10
1H11
Suburban
2H11
1H12
2H12
Note: Medical office data includes 32 U.S. markets
SOURCE: Colliers International
to the recession and had above-average medical office vacancy rates as
of 1H 2013. Construction has fallen off sharply since then in most of these
markets, and thus demand going forward will drive the absorption of existing space with limited competition from new product.
LOWEST OVERALL VACANCY RATES | 1H 2013
MARKET
OVERALL VACANCY RATE
Greenville-Spartanburg, SC
Despite major changes occurring in the health care industry and the deepest recession since the 1930s, the medical office market has been stable
compared with other commercial property types, including traditional office
properties. Long lease terms (typically 7–10 years), as well as the expensive and extensive tenant improvements required by medical users, lend
stability to the medical office property type. The vacancy rate increased
from 12.29 percent in 1H 2009 to 12.82 percent in 1H 2010, and since
then generally has trended downward, lowering to 12.26 percent in 1H
2013. By comparison, the vacancy rate for traditional office increased more
substantially during the recession and remained elevated in 1H 2013 relative to medical office properties. Medical office rental rates also were relatively stable, decreasing by less than $1 per square foot to $23.79 in 1H
2013 compared with $24.65 in 1H 2009. Net absorption remained positive
throughout this period, and the amount of both construction completions
and construction underway decreased significantly.
Small southeastern markets lead the list of the lowest vacancy rates as of
1H 2013. Although not immune to the effects of the recession, new supply
levels were very low in most of these markets in the years leading up to and
following the downturn, contributing to current low vacancies. In contrast,
substantial construction in many larger Sunbelt markets—including many
that had housing bubbles—led to a surfeit of vacant space in those areas,
resulting in the highest vacancy rates nationally. Atlanta, Las Vegas, Phoenix and Tampa Bay-Clearwater all were active development markets prior
1H13
Medical Office
3.00%
Savannah
3.80%
Columbia, SC
4.30%
Memphis
5.20%
Richmond
6.30%
Nashville
6.50%
New York – Manhattan
6.50%
Seattle
6.50%
Milwaukee
7.22%
Miami
8.37%
SOURCE: Colliers International
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6. HIGHLIGHTS | 2014 OUTLOOK | MEDICAL OFFICE | UNITED STATES
UNITED STATES | MEDICAL OFFICE MARKET STATISTICS
MARKET
EXISTING
INVENTORY
(SF)
JUN 30, 2013
Atlanta
OVERALL VACANCY
DIRECT
RATE (%)
VACANCY RATE (%)
JUN 30, 2013
JUN 30, 2013
ABSORPTION
1H 2013
(SF)
AVG. ANNUAL
QUOTED RENT
(USD PSF)
JUN 30, 2013
YEAR-TO-DATE
NEW SUPPLY
(SF)
UNDER
CONSTRUCTION
(SF)
16,166,458
13.60
13.10
95,580
22.53
47,500
100,786
Bakersfield
1,183,984
11.99
10.51
81,296
20.64
90,000
30,000
Baltimore
5,649,274
20.80
20.20
-16,935
24.02
51,524
52,000
Birmingham
1,711,119
23.61
23.61
-153,411
19.70
0
0
Boise
1,771,733
11.62
11.62
-
16.80
85,000
0
Charlotte
8,629,775
11.33
11.01
82,757
24.79
133,945
0
Chicago
23,621,725
14.80
14.50
103,618
21.09
168,180
51,400
Cincinnati
3,928,227
11.23
11.23
101,179
21.64
0
0
Columbia, SC
2,742,721
4.30
4.30
11,863
18.98
0
0
18,991,977
13.24
13.15
200,266
22.81
44,065
176,000
Denver
9,467,489
11.48
11.14
155,600
23.23
92,979
0
Detroit
4,370,087
41.50
41.50
10,566
19.47
0
0
Fort Lauderdale
6,359,878
9.59
9.47
96,585
22.96
0
38,670
Grand Rapids-Western MI
4,425,528
10.47
10.47
46,832
14.81
0
60,000
Dallas-Fort Worth
Greenville-Spartanburg, SC
3,689,102
3.00
3.00
-12,695
13.54
0
0
26,664,926
11.30
11.10
467,399
23.02
30,000
0
Indianapolis
5,204,940
9.06
9.06
22,921
17.90
0
274,000
Jacksonville
1,381,502
25.60
24.90
-41,405
19.07
11,300
0
Kansas City
7,492,420
8.70
8.70
30,960
19.38
0
70,000
Las Vegas
5,282,610
22.35
22.30
-71,908
25.32
0
0
Long Island
9,182,894
8.90
8.80
57,127
27.04
0
74,999
27,087,400
10.80
10.50
-9,980
29.52
41,000
456,300
Memphis
5,845,782
5.20
5.20
83,686
19.21
0
0
Miami
8,272,147
8.37
8.36
-70,991
27.61
29,621
0
Milwaukee
6,600,916
7.22
6.99
-83,842
16.87
0
0
10,427,201
9.20
8.60
26,095
16.40
155,200
477,881
Nashville
7,769,000
6.50
6.30
-26,176
20.43
0
36,000
New York – Manhattan
3,700,418
6.50
6.40
72,790
40.16
0
0
Orange County
13,581,566
10.10
10.00
80,292
29.52
81,000
0
Philadelphia*
14,656,137
9.07
8.90
151,662
20.13
10,200
0
Phoenix
16,056,190
19.80
19.30
-12,733
22.70
18,000
0
1,760,772
9.80
9.80
-1,704
20.21
0
0
Houston
Los Angeles County
Minneapolis-St. Paul
Reno
Richmond
4,135,321
6.30
6.10
-29,646
18.91
0
0
12,912,815
12.49
12.23
142,468
28.24
65,076
0
Savannah
1,477,081
3.80
3.80
10,300
18.42
0
0
Seattle
6,966,672
6.50
6.10
-65,076
34.15
0
0
Tampa Bay-Clearwater
3,654,197
24.10
24.04
-12,399
18.81
21,145
0
San Diego County
Washington, DC
16,359,466
9.80
9.50
113,178
29.66
76,504
382,267
8,210,280
14.31
14.14
-11,018
24.48
0
116,000
337,391,730
11.99
11.75
1,625,101
23.47
1,252,239
2,396,303
West Palm Beach
TOTALS
*Metro area, including counties in PA, NJ and DE.
P. 6
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7. HIGHLIGHTS | 2014 OUTLOOK | MEDICAL OFFICE | UNITED STATES
CONSTRUCTION
Nationwide, medical office properties account for approximately 25% of
all office space currently under construction, totaling 21.0 million square
feet. Although the largest metro areas generally have the largest amount of
space under construction, only 9 MSAs have more than 500,000 square
feet underway. Indicative of the trend of health care providers locating near
their patients, construction is spread out across metropolitan and micropolitan areas, as well as places too small for geographical categorization.
However, in the 32 markets tracked by Colliers, medical office construction activity, especially speculative, decreased significantly in recent years,
from nearly 8.4 million underway in 1H 2009 to just 1.8 million square feet
in 1H 2013. One reason for the decline was the increased usage of nontraditional properties, notably retail, by medical tenants. Retail properties
increasingly are being repurposed for medical uses as providers seek to
locate close to patients and reduce costs by providing outpatient services
in non-acute settings. High retail vacancy—particularly in suburban and
exurban areas—due to overbuilding prior to the recession and housing crisis, and increasing online retail sales, resulted in opportunities for health
care tenants. In particular, well-located “big box” retail properties in the
20,000-to-50,000 square-foot range with ample parking (such as those
occupied by defunct tenants like Borders, Circuit City and Linens ‘n Things)
are well suited for many medical tenants and are more accessible for patients than many urban campuses.
Other types of retail space are being used as well, such as the Maury
Regional Cancer Center at Columbia Mall in Columbia, TN, which offers
cancer treatment, a pharmacy and other services in a large block of vacant
mall space. Another example is Vanderbilt University Medical Center’s conversion of vacant upper-floor space at 100 Oaks Mall in Nashville, TN, for
medical office and ambulatory center usage. Retail clinics will remain an
important delivery mechanism as health care providers seek to cut costs
and handle the surge in newly insured patients with the implementation of
the ACA. Accenture expects the number of retail health clinics to double
to more than 2,800 by 2015, handling 10.8 million patient visits and saving
$800 million annually.
The shift from on-campus, in-patient care to out-patient treatment in offcampus facilities is already well underway: According to an Avalere Health
survey, inpatient hospital admissions averaged 111.8 per 1,000 people in
2011, down from 123.2 per 1,000 people in 1991. Also, outpatient visits
increased to 2,105.6 per 1,000 people in 2011, up from 1,273.4 in 1991.
Improvements in medical technology are also facilitating the trend toward
non-traditional space, such as less invasive surgical techniques that allow
for increased outpatient procedures in off-campus facilities.
Health care employment statistics also underscore the broadening of delivery options for medical services. Although three subsectors—physicians’
offices, hospitals, and nursing/residential—still account for the lion’s share
of medical employment, the outpatient care center and home health care
subsectors have been expanding fastest for the last decade.
HEALTH CARE SUBSECTOR EMPLOYMENT GROWTH
10%
8%
6%
4%
2%
0%
-2%
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
Offices of Physicians
Outpatient Care Centers
Home Health Care
11
20
12
20
13
20
Nursing and Residential
Hospitals
Note: Growth rates are year-over-year; data are seasonally adjusted; latest data as of Dec 13
SOURCES: Federal Reserve Bank of St. Louis, Bureau of Labor Statistics, Colliers International
As health care systems focus on cost containment, providers are integrating post-acute, transitional care units into outpatient facilities in order to
keep patients out of the hospital. Other aspects of the ACA will contribute
to this ongoing expansion of delivery mechanisms for health care, including new funding for the construction and expansion of community health
centers, and the Community First Choice Option, which allows disabled patients access to home and community-based care rather than institutional
care in a nursing home.
SPACE UTILIZATION TRENDS
Much of the space under construction is build-to-suit, and we expect this
trend of customization for the specific needs and location preference
of the tenant to continue. The preference of large medical systems for
customizing their facilities as well as the risk of speculative development
amidst uncertainty regarding the future of the health care industry will
likely support this trend going forward. Also, in terms of project size, new
construction will likely remain concentrated at both ends of the spectrum.
With the ACA shifting the focus of treatment from volume of services to
patient outcome, health care systems are demonstrating a preference
for large, integrated facilities capable of handling multiple functions and
providers in one location in order to maintain control over patient care.
These facilities typically are 50,000–200,000 square feet and offer
longer hours to accommodate a greater volume of patients than smaller
properties. Complementing these large facilities are small clinics located
near patients that focus on one or two specialties, such as urgent care or
physical therapy.
Like the traditional office market, medical tenants increasingly are desiring
more efficient, open spaces that facilitate teamwork and communication.
Many newer facilities and redesigned spaces have fewer private offices
and more shared workspaces. Technology is supporting this trend, as team
COLLIERS INTERNATIONAL |
P. 7

8. HIGHLIGHTS | 2014 OUTLOOK | MEDICAL OFFICE | UNITED STATES
482 offices in
62 countries on
6 continents
United States: 140
Canada: 42
Latin America: 20
Asia Pacific: 195
EMEA: 85
• $2 billion in annual revenue
• 13,500 professionals and staff
• 1.12 billion square feet under
management
members are able to work in multiple locations. Slated for delivery in 2016, the $450 million, 620,000
square-foot Brigham Building for the Future on the Brigham and Women’s Hospital campus in Boston
is being constructed with the goal of creating greater interaction between physicians, researchers
and patients. The building will consolidate employees from multiple locations into a single location
and encourage interactions in hallways, cafeterias and other shared spaces through its design. Some
newer buildings are also downsizing or eliminating large waiting rooms, using technology to more
efficiently manage patient flow and providing smaller waiting areas for patients.
Also similar to the traditional office market, some tenants are opting for part-time leases in medical
suites in order to control costs. These leases enable tenants to secure space that meets their specific
needs, with appropriate equipment and sometimes personnel provided, for only the amount of time
that they need it. With health care providers focused on cost containment, technology usage and
collaboration, these design and occupancy trends will have significant implications for tenant demand
and development going forward.
• $71 billion USD in total transaction value
INVESTMENT CLIMATE
COLLIERS INTERNATIONAL
601 Union Street, Suite 4800
Seattle, WA 98101
TEL +1 206 695 4200
FOR MORE INFORMATION
Andrea Cross
Office Research Manager | USA
TEL +1 415 788 3100
EMAIL Andrea.Cross@colliers.com
CONTRIBUTORS
Jeff Simonson
Senior Research Analyst | USA
Jennifer Macatiag
Graphic Designer | USA
Aaron Finkelstein
Communications Manager | USA
COLLIERS HEALTHCARE
SERVICES GROUP | National Directors
John S. Wadsworth
TEL +1 949 474 0707
EMAIL John.Wadsworth@colliers.com
Jim Allen
TEL +1 818 871 8534
EMAIL Jim.Allen@colliers.com
Copyright © 2014 Colliers International
The information contained herein has been obtained from sources
deemed reliable. While every reasonable effort has been made to
ensure its accuracy, we cannot guarantee it. No responsibility is
assumed for any inaccuracies. Readers are encouraged to consult
their professional advisors prior to acting on any of the material
contained in this report.
Accelerating success.
P. 8
| COLLIERS INTERNATIONAL
The historical stability of the medical office market and the projected growth in demand, due to both the
aging baby boomer population and those newly insured by the ACA, are attracting substantial investor
interest in the product type. The $2.47 billion in Q4 2013 medical office transactions was the highest
volume since Q4 2006 according to Real Capital Analytics, exceeding even the surge in Q4 2012 in
anticipation of tax increases in 2013.
MEDICAL OFFICE INVESTMENT
$, Bil.
8.0
9%
7.0
8%
6.0
7%
6%
5.0
5%
4.0
4%
3.0
3%
2.0
2%
1.0
1%
0%
0.0
2006
2007
2008
2009
2010
2011
MOB 12-Month Trailing Transaction Volume (left-axis)
2012
2013
Cap Rate (right-axis)
SOURCE: Real Capital Analytics
Medical office investment activity was dominated by domestic buyers during the last few years, with
foreign buyers accounting for 1% of investment flow in 2012 and 2013, according to Real Capital Analytics. Foreign buyers such as ProMed Properties and Investcorp that were active in 2011, when crossborder flows accounted for about 12% of all medical office volume, have been nearly absent during
the last few years, while domestic buyers including REITs, private equity and institutional funds have
been aggressively raising capital for health care real estate. A limited supply of medical office properties is resulting in fierce competition for available assets, with buyers increasingly willing to consider
secondary and tertiary markets as well as properties with lower occupancies by hospital tenants. The
large amount of capital raised this year, coupled with the growing ranks of the insured due to the ACA
implementation should support another strong year of medical office investment in 2014.