Medical-Office Sector Leans on the 'Master' Lease

By Dow Jones Business News, August 12, 2014, 05:04:00 PM EDT

By Matt Hudgins

PEARLAND, Texas--The medical-office sector is undergoing a broad transformation with the rise of master leases.

In those deals, a large company or organization leases several floors or an entire building, then typically sublets the space to smaller users. Until recently, the sector had relied on myriad small leases backed only by the guarantees of individual physicians and small practices.

Just this summer, construction kicked off on a proposed medical office building south of Houston after hospital operator Memorial Hermann Health System agreed to lease more than one-third of the building. HCP Inc., a developer, is building the project on Memorial Hermann's campus here, where the hospital system already has a master lease for an existing 80,000-square-foot office building.

Marshall Heins, Memorial Hermann's head of facilities, declined to disclose the terms of the lease or the rent it will pay for the new space. In general, he says, rents are climbing rapidly and property values are eclipsing those of conventional office spaces.

"Medical-office lease rates continue to rise across the country," he said. "This is probably the hottest sector right now."

The deal is an example of a side effect of health-care reform some might not have expected. Across the nation, the value of medical office space is skyrocketing as the size and credit quality of tenants increase.

In the past, many medical offices were leased by individual doctors and small practices rather than by large, well- funded institutions. In an exodus that began in 2009 and accelerated under the Affordable Care Act, many physicians are abandoning the independent-practice model to join large systems that are better able to create efficiencies and control costs.

For example, the Affordable Care Act requires health-care providers to maintain digital medical records by 2015 or lose progressively larger percentages of Medicare reimbursements each year. At Memorial Hermann, doctors to whom the company leases space will have access to Memorial Hermann's digital-medical-records infrastructure, as well as optional services in areas such as reception, billing and office management. Those doctors, in turn, are expected to steer patients to the system's hospitals.

Read the original here:
Medical-Office Sector Leans on the 'Master' Lease