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Obamacare may cure an ailing office market

Consolidations create bright spot for N.J. real estate landscape

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    The Affordable Care Act has been a boon to advisers in law and accounting, who are busy handling client concerns about Obamacare.

    But the new law is poised to make an impact in an unexpected industry: real estate.

    Consolidation among the thousands of doctors in New Jersey has been going for more than a year, but that will accelerate under the Affordable Care Act, according to John Fanburg, a managing member with the law firm Brach Eichler. That's because the law encourages efficiency, which will drive doctors to join larger practices to fend off perceived drops in insurance reimbursement rates.

    That means larger, newer space requirements in a medical office sector that's already strong.

    "The pressure is finally on physicians to move into a larger group," especially among practices with fewer than five doctors, said Fanburg, who heads his firm's health care practice. "That's been the trend for some time around the country."

    A July survey of 150 New Jersey doctors by Roseland-based Brach Eichler found 46 percent of respondents were considering changing their practice structure.

    Nearly half that group said they planned to integrate with another health care organization — a move Fanburg said often leads them to existing large groups or hospitals.

    For landlords, that means new opportunities in a market already faring better than the overall office sector. The medical office stock in the state's 12 northernmost counties is about 85 percent occupied and has remained stable over the past decade, according to NAI James E. Hanson, a Hackensack-based real estate brokerage.

    Through the second quarter, leasing activity totaled more than 310,000 square feet, fueling more than 243,000 square feet of net absorption, the firm found.

    Darren Lizzack, a broker with NAI Hanson, said health care withstood the downturn because of the need for medical services. Demand also benefited from the fact that speculative developers had long overlooked medical office space, he said.

    "I don't think there was an oversupply in the market when the recession hit, so that's why it weathered the storm pretty well," said Lizzack, an associate vice president who specializes in medical space.

    But the sector also is in store for a change, he said, as "the need for 1,500 square feet is a dying breed" among health care users: "Those available spaces today are going to sit on the market for a long time, because the move is in a different direction."

    New development aimed at meeting that demand is appearing in some areas. In Plainsboro, about a mile from one of the state's newest hospitals, River Drive Construction is the general contractor for a 40,000-square-foot medical office building at the Forrestal Professional Center. The project is expected to be complete by early next year, and was 75 percent pre-leased through the summer.

    It is the latest medical project for River Drive, whose president, Joseph Langan, said health care "has been more or less recession-proof for us." And any growth in the sector could help replace niches that have suffered since the recession, such as office interiors.

    "Until we see a lot more job growth, we won't see these fit-outs resurface," said Langan, whose Elmwood Park-based firm also has recently completed medical office buildings in Bergen and Ocean counties. "So that could help fill that void."

    Langan said health care construction typically is more expensive for a developer — roughly $80 to $100 per square foot, versus $40 to $50 for typical commercial space. But experts say medical tenants are more secure and stable for a landlord and investor.

    "Health care is certainly a good safe haven," Lizzack said. Doctors invest heavily in their space up front, so they "don't move around too often."

    Nearly 45 medical office properties traded in North Jersey in the first half of 2013, totaling $115 million in sales volume, according to Lizzack's firm. And sellers are getting better returns than three years ago.

    E-mail to: joshb@njbiz.com
    On Twitter: @joshburdnj

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    Joshua Burd

    Joshua Burd

    Josh Burd covers real estate, economic development and sports and entertainment. Before joining NJBIZ in 2011, he spent four years as a metro reporter in Central Jersey. His email is joshb@njbiz.com and he is @JoshBurdNJ on Twitter.

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