JLL: Healthy outlook for N.J.’s medical office market

An emerging trend in mergers and acquisitions in the health care sector is having an outsized impact on the New Jersey market in particular, according to Blake Goodman, who leads the Healthcare Practice Group within JLL’s New Jersey offices: Health care providers are getting creative with real estate strategies.

Take the Walgreens-owned VillageMD deal that was announced at the end of 2022. VillageMD agreed to pay nearly $9 billion to acquire New Jersey-based Summit Health, the parent of urgent care clinic chain CityMD.

The deal will create one of the largest independent health care provider groups in the U.S., with some 680 locations in 26 markets.

Ongoing consolidation, rising demand for modern medical space and a shortage of large block medical space availabilities is forcing health care providers to embrace using often-unconventional space in shopping malls, retail centers and office buildings.

Goodman believes that large health care providers are increasingly using real estate to take advantage of their growing scale, meaning they are building new facilities and upgrading others to consolidate services in key strategic locations.

In New Jersey, he said, a lack of large block medical space availability is encouraging health care providers and building owners to redevelop outdated office buildings, vacant shopping malls and former department stores.

Blake Goodman.

“With increasing competition, medical providers are aiming to penetrate markets with professional, comfortable and almost experiential offsite locations. That’s why retail sites are particularly attractive. By their nature, retail sites have all of the attributes medical providers are seeking — prime locations proximate to population centers, easy access, great visibility and parking,” Goodman said.

Mall landlords, for example, in response to the e-commerce-driven retail transformation that was compounded by the COVID pandemic, made critical changes that included creating a multipurpose environment.

Goodman said that, by aligning with an institution such as a major hospital and embracing the vision of accessible, modern medical services to create flagship locations, foot traffic can be increased and more potential customers will be brought into the mall.

“Challenges to retail conversions include zoning issues, but, increasingly, local authorities are seeing the benefits of allowing medical uses in traditionally retail locations,” Goodman said. “Developers will also look into power capabilities, ADA-compliant accessibility, and exterior fenestration, but there is little that can’t be overcome with an expert development team.”

What is a safe investment class? Goodman believes the medical office sector’s positive growth trajectory has made it a viable alternative asset for both individual and institutional investors as they look to diversify their portfolios.

“As demand for medical office buildings remains high, investors are provided with stability amid volatility in traditional commercial real estate classes such as office. Medical office occupancy is routinely stronger and, relative to other major U.S. corporate sectors, health care is among the most creditworthy,” he said.

Average credit ratings suggest health care service providers, hospitals and medical operators pose a lower risk of default to landlords than corporate entities in other sectors.

Some of the notable medical projects underway in the state right now include
Hackensack Meridian Health’s $714 million recently completed expansion at Hackensack University Medical Center. The nine-story 530,000 square feet surgical and intensive care tower opened in December 2022.

In New Brunswick, New Brunswick Development Corp., RWJBarnabas Health and the Rutgers Cancer Institute of New Jersey have topped out a 520,000-square-foot facility, which will be the new home of the state’s first free-standing cancer hospital.

RWJBarnabas Health will soon open a new 229,000-square-foot ambulatory medical pavilion at 210 Somerset St. in New Brunswick.

Looking forward, Goodman said a future pipeline of potential mergers and acquisitions is on the horizon as ambulatory health care services, or outpatient services, continue to shift from hospital settings to localized facilities.

According to recent statistics from the New Jersey Department of Labor & Workforce Development, there were roughly 22,995 health care establishments employing nearly 460,612 people in New Jersey in 2020. The majority of these are smaller offices of medical professionals.

“This historic growth to meet market demand, advances in the sector that make many medical procedures less invasive and risky, and consumers seeking more accessible care in modern comfortable locations will continue to drive provider demand for outpatient facilities,” Goodman stated.