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• Does an 1867 law, the Anti-Injunction Act, prevent the Supreme Court from reviewing and deciding the health care law challenge? The act bars pre-enforcement challenges to taxes. The penalty in the health care law for failure to purchase minimum insurance will be enforced by the Internal Revenue Service, but will not appear on a taxpayer’s tax return until 2015.
• Is the so-called individual mandate to purchase health insurance constitutional?
• If the mandate is unconstitutional, can it be severed from the rest of the law or must the entire law fall?
• Does the expansion of Medicaid coverage for the poor and disabled unconstitutionally coerce the states into participating, because if they do not participate, they risk losing federal money in the federal-state funded program?

If all the provisions of the law are upheld, the medical office market will certainly be impacted in a few different ways. First, there will be an estimated 30 million Americans who will have health insurance for the first time. The assumption is that these newly insured patients will begin visiting physicians at their offices more regularly to diagnose, treat and prevent illness rather than waiting to visit a hospital emergency room. Physicians should start seeing more patients in their offices and therefore the demand for medical office space should rise.

Second, within the legislation are provisions that encourage health care providers to coordinate care and form whats called Accountable Care Organizations. The idea is to pay providers based on patient outcomes rather than services rendered. Providing this type of care requires collaboration and coordination, as well as significant investments in infrastructure. The large practice groups, often affiliated with local hospitals, are best positioned to implement this type of care. A great example of this in San Diego would be Sharp Rees-Stealy who just finished building a 102,000 sq. ft., multi-specialty outpatient care center is Sorrento Mesa. This building will house nearly every specialty a patient could need under one roof, in addition to a massive data center storing patient records electronically for the entire systems to access as needed. The end result, what used to be 40,000 sq. ft. medical office buildings housing various 2,000 sq. ft. medical practices has now become 100,000 sq. ft. buildings housing single, multi-specialty providers.

As a tenant representative for medical practices in San Diego, I am often asked about parking requirements for medical office uses. There seems to be a disconnect within the real estate industry about how much parking you are legally required to provide (per zoning), and how much parking you realistically need to provide. Since every municipality has different parking requirements, its important to note the following only applies to San Diego, but is generally the same in most other cities.

Most people believe medical office uses are required by zoning to show availability of five parking stalls per one thousand square feet of occupied space (5:1,000). Although I would agree most medical tenants need a 5:1,000 parking ratio or greater, per zoning it is not required. Page 19 of the Parking Regulations of the San Diego Municipal Code confirms that for most zones, a medical office use only requires a 4:1,000 ratio.

This does not mean that a building with a 3:1,000 overall parking ratio cannot legally accommodate medical tenants. Provided the building can over-allocate parking for the medical portion and under-allocate parking for the office portion, the City would still approve the use. This often happens in the case of older office buildings that were originally intended for traditional office use and, over the years, became more medical. Be careful with this arrangement because as the building fills up with more medical, the parking will quickly become a problem.

There are exceptions to this rule. In recent years we have seen more planned area development and overlay districts that impose regulations on parking and uses outside the bounds of the regular zoning designations. In many cases, these newer developments have specific parking requirements for medical office uses that are typically 5:1,000 or greater. When considering a particular building for purchase or lease, its best to call the city about that specific property to confirm medical is an allowed use and determine how much parking must be provided.

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The already dominant health systems are best positioned to benefit from health care reform. Providers will be offered incentives to provide a coordinated model of care through an Accountable Care Organization (ACO). The idea is to replace the fee-for-service model of care. Transitioning to coordinated care requires significant resources and scale, something only the larger providers have the ability to deliver. Should the fee-for-service model become obsolete, private practices will soon find it hard to compete with larger multi-speciality providers offering lower-cost, coordinated care.

The market is already experiencing an unprecedented migration from private practice to hospital employment. Physicians in private practice are struggling to deal with decreasing revenue and increasing expenses. Hospitals offer predictable work hours, a guaranteed salary and zero financial risk. With today’s uncertain economy the employment proposition is an easy pitch.

As consolidation continues to take place within the industry, the make-up of tenants in medical office buildings will change. A typical  medical suite once housed three physicians in 2,000 sq. ft. offering services in a specific area of medicine. In its place may soon be a 20,000 sq. ft. multi-specialty medical clinic with forty physicians sharing the same space. Perhaps more efficient from a cost standpoint and more convenient for patients, but a significant change for those who own, develop, manage, lease and sell medical office buildings.

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In this quarter’s report, overall vacancy dips below 10% for the first time since 2007 as local hospital systems begin ramping up their outpatient services.

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