Economist: Expect boom in medical offices

May 2, 2011

Demand for medical office buildings is set to grow twice as fast as it was expected to in the next decade, thanks to the Patient Protection and Affordable Care Act.

That’s the prediction of Gary Shilling, an economist and investment adviser, writing in a new report from the Urban Land Institute, based in Washington, D.C.

The 2010 health care reform law will create taxpayer-funded subsidies to help an additional 16 million Americans buy health insurance and help states extend Medicaid benefits to another 16 million people.

Those new beneficiaries will, by 2019, create a need for about 64 million new square feet of medical office buildings, according to estimates by National Real Estate Investor, a trade publication.

That will be an increase in demand of 11 percent from present trends, Shilling wrote. On top of that, the aging of the baby boomers and population growth will add 8-percent growth in medical office demand, he said.

Medical office buildings "will not be plagued in future years by continuing excess capacity, as is the case with residential real estate, malls, and office buildings,” Shilling wrote.

Indeed, his report includes data showing that vacancy rates in medical office buildings were about 12 percent last year and trending down, compared with 18 percent for general office buildings.

Sales prices per square foot in medical office buildings ticked down during the recession, from about $240 to $225. But sales per square foot of all office buildings plunged from a peak of $270 to about $170.

New medical office buildings will be in demand as more and more physicians become employees of hospitals, and offices of smaller practices are replaced by larger facilities in which hospital systems combine many specialists into one building, Shilling wrote.

There may also be need for new space to accommodate new computer systems and electronic-medical record systems now being required by federal health insurance programs.

“Medical care will continue to grow rapidly and steadily for two basic reasons—it is an essential human service, and it is heavily supported by the government,” Shilling concluded.

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