These shifts create an environment for an increase in the number of healthcare providers and in creativity to meet the gap between the cost of providing healthcare and the reimbursement for that care. Healthcare reform is the largest influence of how and what will change our current medical office demand. Hospital systems will be formulating their own customized plan on how they increase their efficiency and implement their strategy to provide efficient, quality, hi technology patient care. This specifically will depend on the system, their size, their financing methods, the services they offer, their market areas they provide service to, who they receive payments among many other variables. New concepts such as accountable care organizations which are partnerships between hospitals and doctors that are jointly accountable for the cost and quality of the patient care they provide, physician employment by hospitals and other healthcare corporation, medical homes are among the concepts being discussed and created during this time of transition.

Legislation might change the way healthcare is delivered to patients but it doesn’t change the fact that there is a deficiency of healthcare providers and medical office space in this market. As the Phoenix market demographics stabilize and grow and the factors pressuring healthcare such as the influx of new uninsured patients and growing number of baby boomers, there will be a need for more medical office space as this transition becomes a reality.

The current estimate in the Phoenix market is that the supply is there to fill the majority of the upcoming demand for medical space; however the size of a new practices and the required medical space for new concepts of providing patient care will be larger than many existing vacant suites. More likely 5,000 – 10,000 SF rather than 1,500 – 2,500 SF as more private practices will consolidate, as well as be purchased by hospitals and the physicians will become employees. The medical delivery model will be more of a larger medical clinic with a continuum of care including primary care practices, radiology, or lab services rather than a small to mid size practice solo practice. Outpatient surgery centers will also continue to be a trend as off campus care will be less costly than on-campus surgery care. In other markets across the country, there has been a trend to create medical clinics in former big box retail centers as there is availability for size, the high parking requirement for medical clinics and signage.

Some of the existing space in the Phoenix area might not be the correct configuration to meet the new space requirements, so based on new configuration or needing a specific location where no existing space is available there might even be a need for new construction or build to suits. But as healthcare reform becomes a reality, our medical office market should see a return to healthier vacancy rates, stabilized and slowly increasing lease rates and a healthier medical office market.