To rent or own? The question, usually considered by prospective home buyers, is now being asked by medical doctors about their office space in the Antelope Valley. The answers have given Toneman Development Corp. the confidence to build three medical office buildings on spec. The 2.1-acre development, named Project 029, on a hill above the Palmdale Regional Medical Center has no buyers in place, but the developer is confident it can sell the individual buildings to separate buyers as soon as they are ready. “What we found from talking to our customer base in the medical and professional community is they would prefer to own rather than lease,” said Eric Kelly, project manager at Toneman. “It makes sense investment-wise. Also, it will be a good fit for medical service delivery under the new health care system.” Indeed, that Toneman would build 24,000 square feet of medical office in the Antelope Valley – where over the last few years other landlords have struggled to lease such space – says a lot about how bullish developers have suddenly become in the era of ObamaCare. The reform law, formally known as the Affordable Care Act, is expected to funnel hundreds of thousands of new patients into doctor offices, clinics and hospitals countywide. And the effect could be especially pronounced in the Antelope Valley, which consistently posts some of the highest numbers of unemployed and uninsured in the county. John Wadsworth, national director of health care properties at Colliers International Inc. in Irvine, said many doctors are trying to figure out national health reform, and until the dust settles, prefer to rent rather than own their office. But there are always exceptions to the rule. “Local market dynamics trump national trends,” he said. “In markets where physicians can forecast past next week, ownership makes all the sense in the world.” Financially, ownership has a strong upside because commercial real estate prices remain low and financing is available for a doctor or group with good credit. Still, it’s a risky proposition to build on spec. “Most developers today won’t build without pre-commitments,” Wadsworth said. Project 029, a reference to the legal parcel number of the land, is located at38900 Trade Center Drive. It is divided into three pieces of land, each with a building between 7,500 and 9,100 square feet. Kelly plans to sell them at $195 a square foot, or $1.48 million to $1.77 million for one building and the surrounding parking. The marketing plan targets doctors who qualify for a Small Business Administration real estate loan. Under SBA guidelines, the doctors have to put up 10 percent of the purchase price, with a federally guaranteed mortgage covering 90 percent. The doctor must occupy 51 percent of the building but could lease out the rest, thus creating a secondary revenue stream in addition to the medical practice. Kelly said he has received inquiries from medical research companies and imaging labs with interest in renting space at the site. Based on feedback from potential buyers, Kelly said that under the new health care reform laws, doctors will need to serve a larger volume of patients to maintain financial viability, since reimbursements from insurance plans sold through state exchanges are expected to be much lower than regular private insurance. However, in the Antelope Valley volume shouldn’t be a problem. Covered California, the state exchange, estimates there are 780,000 people in L.A. County who are low income or otherwise will qualify for subsidized insurance. The Antelope Valley, which still has double-digit unemployment figures, has many residents who should qualify. The higher patient volume is why Project 029 has ample parking and enough electrical capacity to power plenty of medical equipment in a small space. Mike Cambron is director of business development at Palmdale Regional Medical Center. Since the hospital opened in 2010, it has worked to recruit more doctors to the Antelope Valley, but Cambron figures the region still needs about 150 more doctors, based on national guidelines about the number of practitioners for the population. When new doctors move into the area, they want to be near a hospital, Cambron said, but the region’s only other facility, Antelope Valley Hospital in Lancaster, has nearby offices that are 30 to 40 years old; most doctors want newer facilities. The Palmdale hospital, owned by Universal Health Services Inc. in King of Prussia, Pa. has a medical office building on campus, but the doctors can only lease space, not own. Cambron said the Palmdale Medical Plaza, which has 58,150 square feet, is about 75 percent leased. The rent is $2.05 a square foot, making it “some of the most expensive property in Palmdale,” he added. “If 150 doctors came into this community to support the population, where would they locate?” he said. “Toneman and other builders understand that number.” Tristan Greenleaf, senior associate in the Valencia office of brokerage NAI Capital Inc., is familiar with both the Toneman family and Project 029. He doesn’t see any other developers in the Antelope Valley launching spec projects – but that’s not surprising, given Toneman’s style. “(Chief Executive) J.P. Toneman is the most aggressive person I’ve ever met in my life, so it’s not out of character,” Greenleaf said. “In my humble opinion, the reason he’s doing this is that it has high exposure. When there is someone who wants space, this will be the first choice. … It’s the best possible location.” As for price, Greenleaf said it’s high for this spec development, but it’s the developer’s asking price, so the market will determine whether he’ll get it or not. “Everybody wants to take advantage of current rates because it’s still a buyer’s market,” he said. Medical future? David Walter, economic development manager for the city of Palmdale, said a lot of space around the hospital has leased up or sold recently. In fact, Toneman built a small development right in front of the hospital that is fully sold out. Looking to the future, the city hopes to create an industrial cluster in the medical, biotech and related fields with the hospital as a nucleus. And as that comes to fruition, he expects more developers will build spec projects. “I’m fully expecting to see more spec development,” Walter said. “As the economy stabilizes, we will see more of that. It’s less of a risk to finance a spec project in that area compared to other areas of the community because you have a proven driver in the hospital.” Meanwhile, Kelly at Toneman said Project 029 could be ready for occupancy as soon as April. Although the tilt-up concrete walls are barely welded in place, his tradespeople can finish work fast – once the right buyer comes along. “We are ready to close,” he said. “If you said, ‘I need this building now,’ we could have it ready in 90 days.”
Medical Offices Rx for Desert?
