HPG’s own Garth Hogan (National Director – West) was recently quoted extensively as a source in the national publication Real Estate Finance Intelligence. The text that follows offers summary highlights from that article.

Trend #1: Cap Rates are dropping as buyer distributions shift

Cap rates are dropping for medical office buildings in California as more national players are looking at acquisitions in the state. “The local investors have been more of a force in the medical office market in California, but we’re seeing that change,” said Garth Hogan, co-head of the healthcare group at Grubb & Ellis. “The real estate investment trusts are coming back to California and are getting more aggressive with their pricing. We’re starting to see sub-7% cap rates and more and more competition for buildings for sale.

Trend #2: Physicians employed by hospitals

There is a national trend of physicians giving up independent practices to be employed by a hospital or medical group. This phenomenon is clearly evident in some California markets, such as San Diego. “In markets like Los Angeles and Orange County, physicians are less prone to want to be employed by a hospital or medical group. But in San Diego, this model has been employed for years and the city is growing into this without effort. The same is true of Phoenix,” Hogan said.
Although some markets in the Western U.S. and nationally haven’t been able to adapt to this shift, it will become more important as health care reform legislation is implemented. “One of the requirements of the legislation is that physicians have to store all records electronically, which is very expensive and technical,” Hogan said, noting that this is easier for a doctor to achieve as part of a larger organization.

Trend #3: Larger floor plates

This shift to physicians as employees means that there will be growing demand for large floor plates of 15,000 to 40,000 square feet from medical office tenants, he added.

Trend #4: Adaptive Re-use

Similar to the rest of the country, there is substantial adaptive re-use going on in California, with offices and retail centers being converted to medical office centers. Hogan pointed to a medical office park in Newport Beach that had been acquired and converted from a regular office park several years ago. The owners had to get the property re-zoned for medical use, enhance certain systems such as increasing the water and HVAC systems and adding a parking complex. The 200,000 square-foot complex is now fully leased, he added.

Trend #5: Limited New Development

There is little or no speculative medical office development but Hogan noted that a new development can get financing with significant pre-leasing of 50-75%. Cities such as San Francisco are seeing more new development or adaptive re-use of downtown properties. “If there is demand from major hospitals, an investor will align for a project, “Hogan said. Other factors governing development are population density and income levels, he added.
You can read more and find Garth’s contact information on his bio page.

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