Will medical office still be in demand post-pandemic? One Chesapeake project is betting on it

By Kimberly Pierceall – The Virginian-Pilot

CHESAPEAKE — The assumption might have been that a global health pandemic would be a boon for medical industries. While that may be the case for companies working on a vaccine for the COVID-19 virus, the pandemic led to layoffs among medical professionals, and providers sought government relief to stay afloat as they ramped up telemedicine.

Where does that leave your neighborhood doctor’s office?

No one knows for sure how the pandemic will affect demand for commercial real estate long-term, but one thing is certain: A person can’t yet get a root canal or outpatient surgery at home. Offices have also largely reopened and stayed in business.

One Virginia Beach developer who partnered with a Chesapeake landowner is so confident in the demand for medical office space that the company plans to build 92,400 square feet of it.

Since January 2019, not counting hospital development, Hampton Roads has had about 293,000 square feet of new office space open, according to CoStar, which tracks commercial real estate statistics. Of that, 105,000 square feet, or nearly 36%, has been medical office space. That percentage is much larger than other metro areas, including Washington (10%), Richmond (2%) and Baltimore (0%).

The Chesapeake project’s size is not insignificant, said Emiliano Morales Flores, a market analyst with CoStar.

According to CoStar data, medical office vacancy rates in Hampton Roads have hovered around 6%, better than the 8% for all office space, while rent has been, most recently, $19.85 per square foot, slightly less than overall office space in general at $20.31. Medical is typically less, on average, in other markets, too.

The Class A project in Chesapeake off Battlefield Boulevard and the U.S. 168 bypass, south of Chesapeake Regional Medical Center, is asking for $23.50 on a triple-net lease, which includes a tenant’s share of building maintenance costs and property taxes.

It was nearly a year ago that S.L. Nusbaum Realty Co. brokers Chris Zarpas and Chris Devine — with research in hand that showed the existing surrounding medical office space was 97% filled and there were no new developments in the pipeline — went to Virginia Beach-based Robinson Development Group to pitch them on the project.

The land is already zoned for commercial use, but the project will need to go through the city’s site plan approvals.

Chris Sanders with Robinson Development said that once 65% of the space is pre-leased and the company starts construction, it could be open in 11 months. He said he expects to attract those already in the immediate area looking for new space, saying he’s already heard from some, as well as those outside the market looking for access to the nearby Chesapeake Regional Medical Center.

He said the pandemic hadn’t changed their plans and thinks the timing may be a benefit as providers consolidate and look to expand into new space that can offer more modern amenities like better technology infrastructure for telemedicine and HVAC systems that include air purifiers.

“It hasn’t shut practices down,” he said, noting that many have figured out how to manage risks with the now standard strategies: mask-wearing, social distancing and extra cleaning. “They’re still interested in retooling and expanding.”

Hilda Martin, a principal and founder with Revista, which tracks health care real estate information, said a bounce back among medical providers has been visible in the data.

Medical office rent is still being consistently paid to landlords and, “in terms of occupancy, it’s been incredibly stable.” She called medical office buildings a “bubble of stability,” during the pandemic. It was the same after the last recession in the late 2000s. The only change she’s seen has been a delay in opening projects that were already in the construction pipeline. She said she anticipates a leap in demand for health care services, since many people have had to delay visits because of coronavirus shutdown orders.

As for demand outlasting a period of economic malaise, Zarpas is confident there will always be a need for more medical space as the country ages.

“It doesn’t take a rocket scientist to say there’s a need here,” he said.