Medical Office Market Buzzing

The market in medical office buildings is hot, and investors in Northwest Arkansas and beyond are looking at the Interstate 540 corridor as an area poised for long-term growth and stability.

In the last two years, sales of existing structures combined with new construction has added up to nearly 300,000 square feet of new or retrofitted medical space and $85 million in investments.

The increasing interest in medical offices is driven by profound demographic factors — an increasing population and an aging population — as well as the expectation that changes in health care laws will create an entirely new pool of patients.

Perhaps the biggest player in this region’s run on medical offices is Northwest Health System, which has opened 17 new primary care clinics across the region since 2012.

While some clinics were opened in existing space, Northwest has invested heavily in new construction in what are called “super clinics” that can handle a patient’s walk-in needs in a location that is convenient to them.

“It’s been one of our key strategic initiatives over the last two years, to create nice, new, large, clean clinics in high-traffic areas,” said Dan McKay, CEO of Northwest Health System.

The increase in service has entailed the recruitment of 50 new doctors across a range of medical specialties, and those doctors are now based, or will soon be based, in clinics right around the corner.

“It’s a growing market and it’s underserved,” McKay said. “We’re trying to fill an unmet need.”

The push by Northwest has been a boon to local contractors. Hunt Ventures of Rogers is currently building two clinics, one in Rogers and one in Springdale, and Milestone Construction Company LLC of Springdale has already built one in Bella Vista and is about to break ground on a clinic in Fayetteville. Back in 2009, Milestone built Medical Associates of Northwest Arkansas’ 21,000-SF clinic and administrative office in Fayetteville.

“With all the health care issues we’ve heard about, we decided we wanted to look at that market,” said Sam Hollis, president of Milestone. “It made sense. I think this construction will continue as our population continues to grow.”

McKay said as many as 100,000 new patients in Northwest Arkansas could come online as the Affordable Care Act, also known as Obamacare, continues to roll out.

Northwest’s parent company, Tennessee-based Community Health Systems, has identified Northwest Arkansas as a prime location for investments, and by next year, its acquisition of Sparks Regional Medical Center in Fort Smith and Summit Medical Center in Van Buren should be complete.

“This is a good market to put your money in, so that’s what we’re doing,” McKay said.

 

Local Interest

National hospital chains aren’t the only entities that have seen great potential in Northwest Arkansas. Homegrown investment groups like the Arkansas-based CapRocq Medical Office Fund, an outcrop of the CapRocq Core Real Estate Fund, will focus on existing medical office buildings here and in other states.

The time is right, and will be right for years to come, to invest in health care-related real estate, said Dewitt Smith, CEO of CapRocq Core and a principal in CapRocq Medical.

“As any industry expands, there will be opportunities in real estate, and we like the longevity of medical care,” Smith said.

While CapRocq Core is a $55-million fund, the size of CapRocq Medical has yet to be determined. But rest assured, Smith says, that when Caprocq Medical is fully capitalized it will be aggressive in this market and in others.

Adhering to the business model in use for CapRocq Core, CapRocq Medical will focus on existing or completed buildings. However, if a client came with a build-to-suit proposal, CapRocq Medical could oblige, Smith said.

Smith said there are plenty of reasons to enter the health care field, and statistics from various agencies support his optimism.

In a 2010 demographic study, the U.S. Census Bureau predicted a monumental shift in the nation’s population over a 50-year period beginning in 2000. By 2050, according to the Census, the number of Americans ages 65 and older could be as high as 88.5 million, double the projected population of 40.4 million in 2010, the report concluded.

In a 2011 study co-commissioned by the Urban Land Institute and health care investment group Seavest Inc., economist Gary Shilling made several predictions about the future of health care, and more specifically, the buildings that health care will inhabit.

“The demand for medical services in the United States will mushroom over coming decades and, with it, the need for new and refurbished medical office buildings,” Shilling concludes.

His prediction is that the need for medical office buildings will increase by 19 percent by 2019, the growth driven in part by the factors identified by Smith: Obamacare, technology, an aging population, and the fact that current and pending changes in health care laws do not provide for new medical personnel and facilities. On that side of the health care equation, the heavy lifting is expected to be done by the private sector with investment funds such as CapRocq Medical.

“It’s obvious that we’re going to be a regional medical center,” said Smith, referring to this region. “And whether you like Obamacare or not, we’re going to have expanded health care and we’re going to get better at it.”

 

National Players

Investment funds such as CapRocq Medical are in play all across the country, and increasingly, Northwest Arkansas is coming to their attention.

John Schmelzle, principal of Rogers-based Schmelzle and Associates Inc., recently found that out first-hand.

His group owned the Boozman-Hof Regional Eye Clinic at 3737 W. Walnut St. in Rogers. The 19,920-SF building recently sold for $5.2 million, but the property wasn’t even on the market when two national funds, Spirit Realty Capital of Arizona and Georgia-based Carter Validus Mission Critical REIT Inc., made bids.

“We got an offer and we felt the time was right and we accepted it,” Schmelzle said. “I think it’s interesting that national buyers are coming here.”

The market for medical office buildings in larger areas such as St. Louis and Dallas are already tight, Schmelzle said, leading national funds to consider secondary markets like Northwest Arkansas.

“There’s too many guys looking for deals,” he said. “Where do you go?”

Carter Validus made a regional splash earlier this year with the $22.6 million purchase of the Physicians’ Specialty Hospital in Fayetteville. As long as big deals like that are out there, the national funds will continue to make offers and compete in Northwest Arkansas with groups like CapRocq Medical. And they will compete at an advantage, Schmelzle said, because established funds like Spirit Realty and Carter Validus have a low cost of capital, meaning the fund does not have to return as much to its investors, which in turn means the fund can make better offers to sellers.

For his part, Schmelzle has benefited from the uptick in medical office sales. He currently has a three-acre parcel on Walton Boulevard in Bentonville under contract with a national urgent care medical group.

“It’s hot right now,” Schmelzle said.