Business/Economy

Here’s how growth in the health care industry is playing out in Alaska’s commercial real estate market

This is the first of what will be a monthly column on Anchorage commercial real estate by Brandon Spoerhase, a longtime Anchorage commercial real estate broker.

The health care sector has grown across the country. Considering the growth Alaska has enjoyed in this sector over the past decade, our state is no exception to the national trend. Economists suggest this trend shows no sign of slowing down.

The median age of today's Alaskan is 34.7 years, compared to 27.8 in 1986. This change in demographics begs an important question for health care professionals: Where are providers going to invest for the life of their practice? Uncertainties caused by changes in federal regulations regarding Medicaid and Medicare complicate the question.

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Historically, traditional health care growth occurred in hospitals and medical centers. Throughout the years, these entities experienced substantial demand and accordingly, expanded the supply of medical office space to meet this demand.

Undoubtedly, tenancy within the hospital is of vital importance to certain practices, which likely will remain located in medical campuses. Other providers, however, are not as static. For example, some surgery centers and other specialized practices have relocated from traditional hospital settings to office buildings, retail locations, and even have developed custom build-to-suit structures. Dental practitioners have always had the freedom to locate their practices independently throughout Anchorage.

Hospitals have continued to expand beyond their original footprints and now encompass their own "districts." This growth has created a secondary medical real estate market. The perception by some of today's practitioners has changed from "we need to be in the hospital" to "we need to be within proximity of the hospital." As health care practices relocate to arterials such as Lake Otis Parkway and Tudor Road, opportunities have been created for both the redevelopment of existing uses and development of new properties.

For example, Tudor Road, once known for its industrial zoning and bars, is now undergoing a transformation as medical office buildings and retail buildings are redeveloped to support the medical professionals and ancillary health care sector tenants. This infrastructure was partially kickstarted by the reconstruction of the Lake Otis and Tudor intersection.

Additionally, hospitals have demonstrated their anticipated future demand and growth by securing land and retail developments that can one day be turned into medical facilities. For example, the Alaska Native Health Campus currently is the outer eastern boundary on Tudor Road. From that location, multipurpose development down to and including Lake Otis Parkway is fair game and subject to speculation for new mixed use and medical facilities. There are currently multiple medical office buildings being designed and planned for this and next summer's construction seasons.

The banking community also has demonstrated a high level of comfort with this trend by providing financing for medical office building construction projects. Banks see this sector as a solid investment in light of the high cost of medical care and the uninterrupted growth of the industry.

As a result, medical providers are investing in their own real estate assets by forming limited liability corporations (LLC) with their medical practice partners and then leasing the medical practice to the building owner's LLC. This practice is known in the real estate business as "synthetic leasing"; a financing framework in which a company structures the asset's ownership in a way that for financial accounting purposes, the asset is owned by a special-purpose entity and leased to the operating company under an operating lease.

Under this model, the medical partners anticipate tomorrow's growth in their practice by constructing a building today that provides the maximum square footage that the property will allow. This building strategy allows the anchor medical tenant the insurance of having additional square footage of space available as their practice experiences future growth. The currently unoccupied space is, in most cases, leased out to another medical tenant on a 3- to 5-year lease term at about $3 per square foot. This trend is catching on in the medical community given the advantages it offers: guaranteed, ample room for growth during the life of the practice and a solid real estate investment for the partners of the practice as the cash flow from rent is directly related to their existing and thriving medical businesses.

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Given the uncertainty and volatility experienced in other sectors of the commercial real estate market, some commercial real estate developers have constructed build-to-suit projects for medical office tenants and placed the medical tenants on long-term financeable leases. Developers and their lenders have been amenable to this structure given their high confidence in the financial strength of the medical tenants, combined with a high degree of certainty that the tenants will be able to pay the high cost of new construction rent.

Brandon Spoerhase, CCIM, is a lifelong Alaskan, a former member of the Anchorage Planning and Zoning Commission. He specializes in commercial and investment real estate and is the Broker for BSI Commercial Real Estate.  His column appears monthly.

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