Medical space real estate sector remains healthy

By Gertha Coffee

The Atlanta Journal-Constitution

Dr. James Reilly’s dental practice was in a pinch.

He’d worked in the same office for eight years. In fact, the growing practice was actually three offices combined and still tight. “We were just plumb out of space,” Reilly said.

So when Corporate Campus was redeveloped into a mixed-use medical office project and renamed Perimeter Town Center, Reilly was among the first tenants to move into new medical space — at Hammond Drive and Peachtree Dunwoody Road. It was just across the street from his old office, in the area known as Pill Hill.

“We have the same space, but it’s configured better,” Reilly said. “It has better flow, more windows, the hallways are wider. It’s easier to move patients in and out of the office. It’s made us a whole lot more efficient.”

Open since last October, the project is anchored by Piedmont Healthcare and is already 70 percent leased — at a time when other types of new office developments are begging for tenants. While the commercial real estate industry is getting hammered, the one sliver of business that seems to be doing OK is space for medical offices. According to New York-based research firm Real Capital Analytics, medical office space is the sector with the smallest amount of troubled assets — 1 percent or nearly $200 million — compared to $18 billion for the traditional office sector.

The reason: Health care is less sensitive to the general economy, said Kris Miller, president of Ackerman & Co., a full-service commercial real estate company in Atlanta.

“The demand for services tends to be more consistent,” Miller said, because, “the majority of people who pay for medical services don’t pay for it themselves. Government and private insurance cover it. So when you have a recession, demand for health care doesn’t drop as much as say, demand for Rolex watches. Likewise, when things get good, there are no big spikes.”

The nation spends more than $2 trillion on health care annually — more than double the amount spent for food — and health care spending is expected to exceed $3 trillion by 2013, as the number of Americans over the age of 55 continues to grow, according to a report by San Francisco-based Marcus & Millichap, which tracks medical office buildings.

People will continue to seek medical care, the report said, despite a recent slowdown in elective procedures, such as plastic surgery. In metro Atlanta, the fundamentals are in place for long-term growth for medical and dental space, experts say. For example, the metro area is expected to add nearly a million residents by 2013.

Reflecting the overall real estate climate, purchases of medical office buildings peaked last year and slid this year, according to a medical real estate analysis by Ackerman. Developers responded by reining in new projects.

According to CoStar Group, a real estate information firm, less than 200,000 square feet of medical space was under construction in metro Atlanta by midyear, compared with nearly 800,000 square feet for the same period a year ago.