June 6, 2024 | Ella Krygiel
Conversions for medical outpatient buildings was one of the biggest topics at the Medical Real Estate Conference this year – and continues to be part of a bigger discussion in the medical real estate industry. But how cost effective are these conversions?
In conversation with Lorie Damon, Executive Managing Director, Healthcare Advisory Practice Group, Cushman & Wakefield, she discusses the process of these medical conversion projects – including the cost, the implementation – as well as a couple of projects that have converted successfully.
Read her insights below:
Budget Stresses and Infrastructure Requirements
According to the Cushman & Wakefield Vital Signs December 2023: Healthcare Outlook report, hospital systems are experiencing increasing stress to their budgets because of labor shortages, inflation and high contract labor costs, to name a few.
And these costs only continue to grow, says Damon. “In the early 2000s, the average cost to build a hospital was about $1 million per bed (at least in most markets). Now, it’s somewhere between $1.5 and $2 million dollars.”
Damon shares this when discussing the differences in costs between medical office buildings and hospitals. “While medical office buildings are cheaper to build and operate than hospitals, they are still expensive when comparing any medical asset to more conventional types of commercial real estate, such as office buildings. For instance, in every clinic, primary care and urgent care facility, there has to be a sink in every single exam room. If that building wasn’t built with the necessary plumbing, that makes it a very expensive enterprise to convert to a healthcare use.”
And plumbing is just one example of the many kinds of infrastructure requirements needed for healthcare operations to proceed. The initial cost of buying a medical outpatient building, Damon says, should be low enough that when you buy it, you can rationalize all the additional capital that you’ll need to convert it.
In addition, when comparing outpatient to inpatient buildings, Damon says, while outpatient is significantly cheaper, you still need to acknowledge the base rent of the building and the build out costs.
Accessibility, a Component of a Successful Medical Conversion Project
As discussed in the Medical Real Estate Conference session, “Transformative Strategies for Leveraging Core and Non-Core Assets,” despite the demand for outpatient buildings, it is important to remember that many offices will not have spaces that will work properly for medical practices. For instance, the elevator might not be properly sized, or the plumbing might not accommodate the medical needs for the space, or the parking ratio might be too low to accommodate both the medical staff and the patient traffic.
As Damon says, “You can’t really retrofit an elevator shaft very cost effectively.” Despite the less-than-ideal costs of these conversions, there are a couple of projects that have successfully converted these spaces. For instance, a Mid-Atlantic health system is leasing an office building in downtown Washington DC. and converted the standard office space to a multi-specialty clinic.
“This health system needed to comb through the city for every asset that could feasibly accommodate their clinical uses, which was very difficult, as it is very hard to build new buildings in downtown Washington, DC in the very best of circumstances,” Damon says.
Luckily for this health system, they leased an office building among a portfolio of other office buildings, housing more conventional office tenants, such as high-end law firms and trade associations. This proved to be a challenge in its own way as those tenants were initially less than thrilled to share the space with people with ailments. However, the health system’s space is contained in a single building within the portfolio. They were able to utilize the penthouse for a surgery center, and install a backup generator and the required venting for the exhaust, and create a space that ultimately makes going to the doctor an easy and convenient commute for those working in the city.
Improving accessibility was part of this health system’s priorities, as they were able to capture a patient population who preferred closing the distance for their healthcare check-ups. “If you work in Washington and you live somewhere else in the suburbs and you have a doctor’s appointment, you will much prefer a short commute to your clinic in the area, rather than eating up your day commuting home to your doctor’s office,” Damon says.
Universal Design Components and Other Trends
“Conversions are not for the faint of heart,” Damon says, “But there are certainly some successful conversions like the Mid-Atlantic health system’s project that works extraordinarily well.”
And, it’s important to note, Damon says, “Post-pandemic, health systems invested a lot of money to create ‘universal designs’ which have been gaining traction in healthcare circles for a while. Universal design is this idea that architects are designing buildings with the purpose of making the space work or readily adapt for any kind of clinical use.”
For example, designing a space that can be repurposed to suit a cardiologist or oncologist’s needs, could be key to making the building last longer – easily more than 30 or 40 years. “If you’re constantly building a space out, it’s disruptive,” Damon says. “Number one, it’s expensive. Number two, you have to implement infection prevention protocols, anytime you do anything in a medical office building. And so [universal design] is a way of helping to kind of ease a lot of those activities.”
Overall, medical facilities and projects only continue to evolve and expand as the industry becomes versed in learning the best cost-effective strategies. Trends like Patient Satisfaction Ratings, where patients are sent surveys after their visits to determine the quality of their experience – and implementing sustainable components like natural lights and greenery to medical facilities will maintain its growth.
And, of course not to mention, the patient’s experience will always remain at the forefront of the medical industry when considering improvements to its care.