News Archives | Healthcare Real Estate Services | Davis

Category: All News

The Health of The Medical Real Estate Market

Despite challenging economic conditions and continued operational issues for healthcare providers, the medical commercial real estate sector remains a stable and strong asset class.

Revista tracks just over 20M sf of medical buildings in the Twin Cities market area that includes both multi and single tenant buildings. It shows a 93% occupied rate which has continued to hold strong throughout the pandemic and beyond. With higher interest rates, increased construction costs and material delays, we’ve seen increased renewal and expansion leases in existing product as opposed to new leases in new construction recently, which has kept net rates and occupancy up. Revista reports a 17.5% decline in new construction starts and a projected continual slowdown through the 2nd quarter.

A $22/rsf net average rate is reported, which includes some larger single tenant rates and lower rates on challenged assets that lower the overall average rate. We are seeing net rates for multi-tenant Class A space at an average of $24+/sf for existing buildings and $28–$34/sf for new construction. There is an annual increase of between 2.5–3%; this has been increasing due to higher inflation.

Lease terms for new leases remain long, often 10–20 years, so users can secure appropriate space and request high improvement allowances in the $100/sf+ range pending lease term, credit and rate.

Operating expenses continue to increase with rising real estate taxes, cleaning and utility costs averaging another $20/sf over the base rate. Gross rental rates can reach up to $50/sf which can be challenging for a sector pressured with lower reimbursements and high labor/operational costs.

Higher interest rates also slowed sale transactions and kept cap rates higher than historical levels but still in the 6% range for quality assets. However, if we see reductions in interest rates this year as projected, we anticipate increased transaction volume, including the larger REITs.

Medical building fundamentals remain strong compared to the general office market where work-from-home trends have shuttered many office buildings. An aging demographic has supported care closer to home and the desire for outpatient facilities. The healthcare sector has opted to rename the “O” in “MOB” (Medical Office Building) to Medical Outpatient Building, there are enough differentiators to warrant this effort.

With technological advancements and the need for more outpatient care, we forecast a continued strong and stable medical outpatient building sector into the future.

 

The Most Successful Negotiation is One That Crosses the Finish Line

When it comes to commercial real estate, artful negotiation is the cornerstone of success. Whether you’re a seasoned owner or just starting out, the ability to navigate a negotiation can make or break a deal. Here are some key considerations and strategies that can help to get your transaction across the finish line:

Don’t Do It Alone

In complex commercial real estate transactions, particularly in the healthcare space, it’s wise to seek advice from experienced professionals such as real estate brokers, attorneys or financial advisors. Healthcare deals are often expensive long-term commitments. The guidance of the right qualified advisors who live in the healthcare real estate world day in and day out can provide valuable insights, mitigate risks, and ensure that your interests are expertly represented throughout the negotiation process.

Do Your Homework
Knowledge is power in negotiation. Before entering into any negotiation, thoroughly research the property, comparables, the other party and their motivations. Having a deep understanding of the overall context and underlying factors of the deal will give you leverage and confidence during discussions. Your advisory team can help you access and process this information.

Set Clear Objectives

Define your goals and priorities before initiating negotiations. Determine your desired outcome; including price, terms and any contingencies. Having clarity on what you want to achieve will guide your negotiation strategy and help you stay focused during discussions.

Build Rapport

Establishing a positive relationship with the other party and/or your client is essential for successful negotiations. Be respectful, empathetic, and professional in your interactions, even when things get tense or drag on way longer than they seem they should. Communicate consistently and follow through with building rapport to create trust and foster open communication, so it’s easier to find mutually beneficial solutions.

Listen Actively

Effective negotiation is not just about making your case; it’s also about understanding the other party’s perspective. Practice active listening to comprehend their needs, concerns, and objectives. By demonstrating empathy and understanding, you can tailor your proposals to address their interests while advancing your own agenda.

Look for Win-Win Solutions

Strive for outcomes that benefit both parties involved. Instead of viewing negotiation as a zero-sum game where one side wins at the expense of the other, aim to identify opportunities for mutual gain. Collaborative approaches often lead to more sustainable agreements and long-term relationships.

Don’t be Surprised by Compromise

Negotiation inevitably involves give and take. Identify areas where you’re willing to be flexible while prioritizing your non-negotiables. By showing a willingness to compromise on certain aspects, you can encourage reciprocity from the other party and more quickly facilitate progress toward a mutually acceptable agreement.

Document Agreements in Writing

Once an agreement is reached, document the terms in writing to avoid misunderstandings or disputes later on. A well-drafted contract should clearly outline the rights, obligations, and responsibilities of each party, providing a solid foundation for the transaction. We always recommend using an attorney with relevant experience to draft any legally binding documents.

Here at Davis, we proudly employ these strategies. In combination with our unparalleled healthcare real estate expertise, our team completes +/- 100 transactions annually, and would be honored to help you with yours.

Xchange Medical—Winner of a Local TOBY Award

 

 

 

Davis is proud to announce Xchange Medical, located in St. Louis Park, has won the 2024 BOMA Outstanding Building of the Year (TOBY®) Award in the local Medical category. The TOBY® Award is the most prestigious and comprehensive program in the commercial real estate industry, recognizing excellence in commercial building management and operations.

Submitting a TOBY® award is no easy feat. With three levels–local, regional, and international–each award attained paves the way for submission at the next level of competition. At the local level, the submission process requires a significant investment in time, including a 90-minute project tour to a group of esteemed TOBY® judges. To support our chances at the regional level, we sought validation through The BOMA 360 Performance Program. This rigorous evaluation scrutinizes buildings across six critical domains, designating buildings that achieve operational excellence while providing tangible benefits to occupants.

Setting the standard for Medical Facility Management

Owned and managed by Davis, the 78,000 SF Class A medical facility is recognized as a BOMA 360 Performance building. Located directly adjacent to I-394 in the heart of St. Louis Park, Xchange Medical spans a 4.6-acre site and is home to multiple medical office tenants including OVO Lasik + Lens, ENT Specialty Care, Surgical Specialty Center of Minnesota, and Retina Minnesota/Vitreoretinal Surgery. With critical operations taking place within its walls, the operations and management strategy was driven by the specialized services provided within. From HVAC and mechanical systems capable of maintaining 24/7 positive pressure, robust and dynamic layers of security, to the building’s interior daylighting every aspect of the property is carefully considered to create an optimal environment for healthcare professionals and patients alike.

Commitment to Sustainability, Health and Wellnesss, Training and Compliance

Various energy-efficient features have been integrated into the facility, including solar-powered exterior lighting, hot water heat curtains, and optimized boiler temperatures to reduce energy consumption all with a focus on maintaining patient safety and comfort. Environmental, social and governance (ESG) initiatives don’t stop there—they go well beyond mere functionality with the incorporation of an expansive two-story living wall, energy efficient LED lighting, natural and local materials, electrical vehicle (EV) charging stations, bicycle racks, a staff picnic area, rooftop patio, and healing garden with on-site honey producing beehives. Together these unique features create a holistic environment conducive to meeting today’s wellness standards. With the facility conveniently situated along a bus line Davis leveraged this opportunity to increase accessibility through the installation of a bus shelter to further promote sustainable travel while fostering a safe place for riders to wait.

Additionally, Davis’s commitment to training and compliance sets a benchmark in the industry, evident through the array of rigorous training programs maintained by staff overseeing operations within Xchange Medical. From janitorial staff to building engineers, every individual responsible for facility operations has undergone comprehensive training in specialized areas, like biohazard and chemical disposal, to ensure safety and compliance. As a surgery center, the scrutiny is heightened, with frequent inspections of critical systems and an elevated level of compliance oversight. This dedication to operational integrity and compliance not only meets the stringent requirements of regulatory bodies but also fulfills the expectations of healthcare providers and patients alike.

Expertise that Supports the Future of Healthcare

Looking ahead, the ever-evolving landscape of emerging technologies, shifting healthcare policies, and enduring challenges drives transformation in healthcare property management. The Davis property management team offers distinctive expertise to influence patient outcomes within this complex ecosystem. By strategically prioritizing continuous improvement and regulatory compliance alongside the safety, satisfaction, and well-being of providers, patients, and community members, the Davis team stands poised to enhance facility success well into the future.

An Exceptional Management Team: The success of Xchange Medical can be attributed to the meticulous management and operational strategies implemented by Davis, in collaboration with our partners in preventative maintenance, electrical, plumbing, and HVAC services from United Operations and Gilbert Mechanical. Behind this achievement lies a dedicated and skilled team, including Peggy Schatz, Alicia Schaeffer, and Melissa Early, whose leadership and attention to detail were instrumental in securing the BOMA TOBY® Award. Their strategic vision has set the standard for excellence in medical building management.

Davis acquires Zachary OMF I in Zachary, Louisiana

MINNEAPOLIS (January 16, 2024)—Davis Healthcare Real Estate completed the year-end acquisition of Zachary OMF I, a 24,465-square-foot outpatient medical facility in Zachary, LA, approximately 20 minutes north of Baton Rouge. It represents the firm’s first acquisition in Louisiana. Davis Medical Investors, LLC (DMI, LLC), acquired the property for approximately $8.6 million or $350/SF.
“This is a great opportunity for Davis to acquire a high-quality and well-established outpatient medical facility in an underserved market in Louisiana,” said Stewart Davis, Executive Vice President of Investments, Davis Healthcare Real Estate. “Given the landscape in the area, we believe this will allow us to establish a presence in the marketplace and build scale over time.”

The single-story Zachary OMF I is located at 4845 Main Street in Zachary. The building was developed in 2011 as a local hub for outpatient surgical procedures. At the time of the acquisition, the building was 100% leased to three synergistic tenants: Zachary Surgical Center, Ochsner Health, and Moreau Physical Therapy.

Ochsner Health is recognized as the leading healthcare system in Louisiana, with more than 40 facilities across the state. It uses the space at Zachary OMF for primary care services, women’s health, and ENT. The Surgical Center of Zachary is a well-recognized outpatient surgical center in the area. It completes orthopedic, gastroenterology, podiatry surgical and pain management procedures in the space. Moreau Physical Therapy provides a variety of physical therapy services across Louisiana.

Because of changing market conditions, Davis said the firm is looking optimistically at 2024.
“We’re all familiar with the capital market instability that has characterized the HRE landscape over the last 12–18 months and made it challenging to underwrite acquisitions,” Davis said. “But we’re optimistic that there will be more certainty moving forward which will hopefully allow the market to settle into a new equilibrium where we can start getting deals done again.”

Davis acquires UT (University of Texas) Health & Wellness Center in San Antonio, TX

 

MINNEAPOLIS (January 16, 2024)–Davis Healthcare Real Estate has completed the acquisition of the two-story, UT (University of Texas) Health & Wellness Center in San Antonio, TX which allows the real estate investment firm to expand its holdings in a dynamic, growth-oriented market. The building was acquired by Davis Medical Investors, LLC (DMI, LLC), in an off-market transaction for $24,310,000 or $332/SF.

“We’ve been looking to expand into Texas, and in the San Antonio market specifically, for a few years now,” said Stewart Davis, Executive Vice President of Investments, Davis Healthcare Real Estate. “The building, located across the street from the fast-growing medical corridor in Northwest San Antonio, represents a great addition to our fund because of the credit worthiness and market presence of the tenant, the length of the lease term and the ability to immediately achieve scale in this market.”

The 73,390-square-foot UT Health & Wellness Center is located at 5788 Eckhert Road. The building, formally leased to the VA, was originally developed in 1998 and went through a comprehensive renovation program by the previous owner in 2022. It is fully leased to the University of Texas Health System who view this as a strategic location for the future.

The UT Health & Wellness Center is located in the heart of the 900-acre South Texas Medical Corridor area that continues to attract widespread attention and spawn significant new development in the area. The South Texas Medical Center is home to 9 major medical institutions—including the University of Texas—and hundreds of offices that employ more than 30,000 healthcare and related service professionals. Among some of the specialty areas it is known for include cardiovascular, rehabilitation, neurosciences, neonatal and emergency services, among others.

Because of acquisitions like UT Health & Wellness Center and changing market conditions, Davis said the firm is looking optimistically at 2024.

“We’re excited for 2024. It could be a good year to get more aggressive,” Davis said. “While the bid-ask gap hasn’t changed much yet, the likelihood of interest rate declines later this year and dry powder on the sidelines could change that and make it easier for deals to get done.”

610 Medical: A Beacon of Healthcare Excellence

In the ever-evolving realm of healthcare, envisioning the future and daring to venture into the unknown are the cornerstones of innovation. The development of 610 Medical epitomizes this spirit—where strategic foresight, inventive problem-solving, and a dash of calculated risk have redefined healthcare accessibility in the northwest metro area.

A Strategic Partnership: The Start of an Incredible Journey

In 2020,  Allina Health embarked on a strategic partnership with SCA Health to establish a network of ambulatory surgery centers (ASC) across the Twin Cities. The project presented a dual challenge: creating a cutting-edge ambulatory surgery center designed for scalability and future growth, while concurrently establishing a model that could be effortlessly replicated across various sites in the future. Davis successfully responded to SCA’s Requests for Proposals in three separate market areas: Lakeville, Vadnais Heights and Brooklyn Park.

In response to the RFP to developers for a medical office building in the Northwest market corridor, Davis proactively secured an ideal site in Brooklyn Park–a 7-acre parcel with convenient interstate access.

Recognizing the promise of the selected site, Davis chose to acquire double the necessary acreage, seizing the opportunity amidst market speculation, even in the face of high-interest rates and complex leasing dynamics. While only four acres were required for the 41,000-square-foot MOB development, the surplus acreage held potential for future expansion or sale. Despite the bold move to proceed with construction in a market grappling with a 30% post-pandemic increase in material costs, Davis’s decision showcased strategic foresight. With just 18,500 square feet pre-leased, committing to construction at only 45% occupancy marked a bold diversion from their usual strategy of waiting until the facility is 70% pre-leased before breaking ground.

A Value-Driven Leasing Strategy

Working in collaboration with Allina and SCA Health, a successful leasing strategy followed suit. This strategy specifically targeted healthcare groups that aligned with and complemented the planned ASC. Notably, this involved the successful pursuit and strategic lease negotiation with Minnesota Urology, an existing tenant in another property owned by Davis. Simultaneously, Allina approved an additional 7,500 square foot lease for their orthopedic team, resulting in comprehensive healthcare services. This value-driven approach effectively addressed a market gap, while meeting the needs of the surrounding community.

Designing for Tomorrow

Featuring split-face stone walls, expansive glass windows, and metal panel insets, the design seamlessly complements its eco-friendly ethos. Engineered with top-notch insulation, glazing, mechanical, plumbing, and lighting systems, 610 Medical surpasses current energy standards. Additionally, the majority of the Allina/SCA surgery suite embraces DIRTT, a sustainable prefabricated interior solution. The integration of medical gas components, custom graphics, video and communication systems is executed seamlessly within the space. These collective strategies work harmoniously to enhance the overall patient experience and foster a conducive environment for healing and recovery.

A Testament to Meaningful Innovation

In its role as a regional hub, 610 Medical has transcended the expectations of a traditional multi-specialty medical building, attracting patients from a wider market area with its diverse physician specialties. By establishing a new standard for healthcare real estate and development, the facility not only delivers accessible healthcare services but also makes a meaningful contribution to the local economy through the creation of high-paying jobs.

In navigating the dynamic healthcare landscape, adaptability and strategic vision have been pivotal to 610 Medical’s success. Beyond being a structure, it stands as a testament to Davis’ unwavering commitment to innovation and transformative healthcare solutions for the community. The story of 610 Medical reflects a vision brought to life, demonstrating the profound possibilities that arise when dedication meets innovation and tenacity.

ASCs Today: Navigating the Current Landscape and Future Expansion in Healthcare

Ambulatory surgery centers are not just the future; they are the present. More than 50 percent of all ambulatory surgeries are currently performed in ambulatory surgery centers. The growing gap between outpatient surgeries in a hospital setting and in an ASC will not abate in the foreseeable future due largely to cost factors. Insurance companies believe they can reduce costs in half or more simply by moving surgeries from a hospital to an ASC—the same surgery done in an ASC as a hospital can cost up to 75 percent less. Patients generally prefer the convenience of not having to navigate a hospital campus and being among a much more unhealthy population. Many ASCs offer a specialty focus, providing greater efficiencies for the surgeon. Additionally, surgeons can be investors in ASCs allowing them to capture a portion of the facility fee on top of their professional fee. 

The growth in outpatient surgeries (projected to grow 25 percent over the next 10 years) coupled with the movement of surgeries out of the hospital means that the development of new outpatient surgery centers will continue for the foreseeable future. Just in the past three years, Davis has worked with its clients to develop six ambulatory surgery centers across the Twin Cities. These have included both single-specialty surgery centers and multi-specialty surgery centers. The common denominator has been a desire to develop a state-of-the-art surgery center in suburban locations that are readily accessible and highly visible.

The recently completed Eagan Specialty Center in Eagan is a compelling case study. The surgery center is a joint venture between Midwest ENT and St. Paul Eye Clinic. Having reached capacity at its Woodbury ASC, the two specialty practices explored expanding in Woodbury, developing a new surgery center to accommodate both practices and disbanding the partnership with one practice taking the Woodbury location and the other developing a new surgery center. The partners ultimately decided to develop a second surgery center in partnership because it afforded the greatest opportunity for growth and profitability.

Davis worked with Midwest Surgery Center to identify patient travel patterns, market demographics and competitor locations.  As with all real estate assignments, Davis first identified the ideal ASC location (in contrast to first identifying available options). Eagan offered the preferred demographics and best complimented the Woodbury Surgery Center and the two partner clinic locations. With a focus on Eagan, Davis secured a site that had the requisite visibility and accessibility to the major regional arteries (Davis had to negotiate access easements with the adjacent property owner and the county—these challenges had kept other developers from pursuing the property).

To ensure seamless integration, Midwest Surgery Center enlisted in-house Synergy Architectural Studio for the design of both the shell building and interior ASC. This comprehensive approach allowed the building shell to align with the ASC’s requirements, emphasizing the significance of strategic planning and collaboration in the successful development of a state-of-the-art surgery center.

Ambulatory Surgery Centers: Elevating Care with a Focus on Convenience and Quality

Collaborating with developers to manage costs and potential delays, providers are increasingly opting for long-term leases to avoid significant capital investment. In this article we will explore the financial aspects, including rental rates, build-out allowances, and operating expenses, while emphasizing the current challenges and future trends.

We’re amid a significant shift in the healthcare landscape, driven by demographic changes, the necessity of cost control, and the relentless pursuit of improved patient and staff experience. This is fundamentally changing the way healthcare is delivered, and the leasing market is evolving in step with this shift. As a result, we are witnessing a significant transformation in the landscape of healthcare real estate, with the leasing of ambulatory care clinics and surgery centers playing a critical role in this change.

Providers, in their pursuit of optimizing patient care, are forging partnerships with developers to reduce cost burdens and improve proximity to their patient base. By opting to lease, healthcare providers can conserve capital for other essential operational and medical needs. Instead of tying up capital in real estate, providers can invest in areas such as advanced medical equipment, cutting-edge technology, or specialized staff—resources that directly contribute to the provision of superior patient care.

A prime demonstration of this trend is the Lakeville Specialty Center, a collaboration between Davis, Allina Health, Allina Health Surgery, and MNGI Digestive Health. Lakeville is a fast-growing market and these providers implemented strategic plans to enter Lakeville and provide quality specialty care along with day surgery services. The strategically located 100,500-square-foot facility which houses two ambulatory surgery centers (ASCs) and opened in January 2024, was established under long-term leasing agreements that enabled these healthcare providers to expand their services without a significant strain on their financial resources.

Other successful surgery center projects we have completed recently that support this trend include Surgical Specialty Center of Minnesota at Xchange Medical in St. Louis Park, Allina Health Surgery at Helene Houle Medical Center in Vadnais Heights, MNGI Digestive at Maple Grove Specialty Center, Allina Health Surgery and Orthopedics at 610 Medical in Brooklyn Park and Midwest Surgery Center at Eagan Specialty Center.

Long-term leases spanning 10 to 20 years are now the norm, as they reflect the substantial time and financial investment required to build out new specialty care space (often upwards of $160/sf for clinic space, and $300/sf for ASC space), especially in the current economic conditions fraught with supply chain delays and escalating costs. In response, landlords are now offering sizable build-out allowances, often exceeding $100 per square foot, to expedite tenants’ capital approval processes.

Rental rates have seen an upturn, largely due to climbing interest rates and construction costs, ranging from $28 to $32+ per square foot, depending on factors like lease term, improvement allowance, and tenant credit. Coupled with operating expenses often exceeding $20 per square foot, gross rental rates can easily surpass $50 per square foot. Annual rent increases have pushed to and above 3% due to continued higher inflation.

Looking forward, this shift in the healthcare market is likely to spur innovation and drive the development of more efficient, flexible, and patient-friendly facilities. With the continued transition towards value-based care and outpatient services, the leasing of ambulatory care clinics and surgery centers is poised for growth. By choosing to lease, healthcare providers are not only positioning themselves to adapt to the evolving demands of their patient population but also capitalizing on opportunities to innovate and enhance the delivery of care.

Feed My Starving Children Volunteer Event

In line with our commitment to drive positive change through the Davis Difference, our team united for a volunteer effort at Feed My Starving Children (FMSC). FMSC, a nonprofit, depends on donations to cover meal ingredients and relies on volunteer teams to pack these meals by hand. Collaboratively, the Davis team packed an impressive 10,356 meals, destined to reach families in need around the globe.

FMSC believes hope starts with food, which is why this organization works tirelessly with its network of food distribution partners to serve its mission of feeding children and saving lives all across the globe. FMSC’s impact extends beyond immediate relief; they remain committed to communities for the long term, empowering them to transition from dependency to stability. Additionally, all distributed meals are developed by food science and nutrition professionals to supplement nutritional needs and reduce common problems associated with malnutrition.

Davis places immense value on supporting nonprofits like FMSC. It is heartbreaking to learn that every year millions of children die from preventable causes. By our estimate, at least 6,200 children die each day from ailments directly related to starvation and/or undernutrition. We encourage anyone touched by this post to rally their own team of volunteers and set up a time to make a difference. Making a difference may require a village, but when we unite, lasting change is not just a goal; it’s the beginning of a transformative journey.

How to Help

www.fmsc.org

Volunteer Your Time: Become a part of the change! Sign up for a volunteering session at FMSC. Your hands-on help makes a direct impact on packing and distributing meals.

Donate Financially: Contribute to the cause by making a financial donation. Your support helps fund essential meal ingredients and sustains FMSC’s mission to fight global hunger.

Spread the Word: Awareness is key! Share FMSC’s mission on your social media platforms. Encourage friends and family to get involved and make a difference.

Organize a Fundraiser: Host a fundraiser to support FMSC. Whether it’s a virtual event, a charity run, or a bake sale, every contribution adds up to help those in need.

Corporate Partnerships: If you represent a company, consider establishing a corporate partnership with FMSC. Collaborative efforts can magnify the impact and contribute to long-term solutions.

Advocate for Change: Use your voice to advocate for policies and initiatives that address global hunger. Engage with your local representatives to promote awareness and support for the cause.

Attend FMSC Events: Stay connected with FMSC by attending their events. Whether virtual or in-person, these events provide opportunities to learn more, connect with like-minded individuals, and further support the cause.