A small but noteworthy cohort of tenants will be leasing specialized space as the Ontario government moves toward granting licences for a raft of new independently operated surgical and diagnostic clinics. Two calls for applications from prospective service providers have been conducted since the summer with the third slated for later this fall.

Under the rules set out in the provincial Integrated Community Health Services Centres (ICHSC) Act, these will be out-of-hospital facilities where patients can obtain publicly funded orthopedic surgeries, gastrointestinal endoscopy procedures or MRI and CT scans. Chosen candidates will first be provisionally approved through the application process and then have a prescribed period to fulfill all licensing conditions. That includes a pre-licensing facility inspection to confirm it complies with required standards.

“The proactive groups that are applying for these licences and have the belief that they are going to be successful, they’re out looking for space today so they can be prepared to sign a lease quickly and get up and running,” reports Scott Rasmussen, a vice president and sales representative with Colliers Canada’s life sciences and medical tech advisory team. “This is a unique opportunity for innovative practitioners to support the Canadian health care system, and some buildings are more suitable than others to accommodate it.”

It’s foreseen that significant capital upgrades would be needed to offer health care in conventional office buildings, while some would be outright disqualified for some services. Heavy and/or delicately calibrated diagnostic equipment may require floor loads and vibration safeguards beyond the structural capacity of existing stock. Other buildings would not have spacious enough corridors and/or elevators to handle stretcher gurneys if immobile surgical patients had to be moved in an emergency evacuation.

There would also generally be heightened requirements for ventilation, backup power, infection control and waste handling. Thus, it’s not a straightforward formula to compare facilities costs in hospitals and commercial real estate. Gordon Burrill, president of Teegor Consulting, a firm providing facilities management and construction services to the health care sector, cautions against simple assumptions based on current hospital construction costs and seemingly cheaper space elsewhere.

“There’s a reason why hospitals are more expensive and office space is less expensive. It’s about the infrastructure within those two building types,” Burrill says. “You might be looking at office space that is x number of dollars per square foot, but then there are all these upgrades that will have to go along with it. ”

Relief valve for backlogged service delivery

The pending new clinics in Ontario are intended to be a relief valve, not a competitive alternative to existing health care delivery. Licences will be tied to regions where there is high and backlogged demand for the designated services.

“It’s a licence to support the need. Just because there are entrepreneurs who believe they can deliver the services, doesn’t mean that licences will be granted,” Rasmussen reiterates.

Both he and his colleague, Matthew Johnson, a senior vice president with Colliers, anticipate that densely populated urban areas will fall within that high-needs category. However, there is little expectation for the multi-tenant buildings solely geared to private medical clinics seen in the United States.

Ontario’s new clinics are more likely to be scattered in a patchwork of suitable commercial buildings and life sciences facilities that predominantly house research activities. Existing health care and life science research clusters are identified as a logical source of qualified clinic operators, particularly given the professional fluidity that commonly sees medical clinicians and researchers serving on university faculties and sometimes becoming med-tech entrepreneurs.

“Some of the great life sciences and med-tech IP discoveries are generated by the people who are doing that medicine day-to-day and are trying to find a way to improve it. So you can have the chief executive officer of an early-stage life science company running the company in the morning then going to the university to teach a class or to the hospital to scrub in for a surgery in the afternoon,” Rasmussen observes. “Proximity provides the ability to get back and forth to these different parts of their lives, or the different hats they wear, on a convenient basis.”

“There would be logical reasons why a clinic would go into a life science building to be in a cluster of other like organizations to create this community of ebbing and flowing,” Johnson concurs. “This is an area that could be a tremendous focus for future development in the life science development space.”

He hypothesizes that savvy investors and developers will need to understand the complexity of their medical tenants’ needs and the capital required to meet them, and also grasp the more intangible factors for patients. Some traditional tenets of real estate may not apply.

“I have never met anybody who would say: My number one priority for my knee replacement is convenient location,” Johnson quips. “It’s tough to quantify, but, if the facility doesn’t feel right, people utilizing that facility may question the quality of the service being given to them.”

Expanded role for third-party facilities managers and maintenance contracts

The ICHSC Act assigns Accreditation Canada the responsibility for overseeing compliance with facilities and medical practice standards in both new and existing independently operated surgical and diagnostic centres. (The latter encompasses roughly 900 Ontario clinics licensed to provide a range of publicly insured health services including eye and plastic surgeries, abortions, dialysis and sleep studies.)

As it pertains to facilities management, a statement from the not-for-profit inspection body says it will use “expert and trained peer assessors” in the “assessment of the physical environment and its proper maintenance, as well as maintenance of the equipment used in the provision of services offered”. In practice, this means that clinics will be held to the same body of standards as every other health care facility.

“If the service is being funded by the provincial government through the Health Ministry, it’s a health service,” Burrill confirms. “It doesn’t matter what kind of a building it’s in, it has to meet all the appropriate health care standards.”

Yet, there should be some simpler requirements — for example, related to contingency power — because of the scoped service offerings compared to large health care centres. “If it’s a surgical clinic, you don’t need three days of backup power for a space like that; you just need enough time to be able to finish a surgery safely. The standards do accommodate for that to a certain degree and do provide for more economical space (than in hospitals) in some conditions,” Burrill advises.

On the flipside, moving to an out-of-hospital location means losing in-house facilities managers. Third-party service providers and maintenance contracts are likely to have an expanded role.

“Maintenance of health care facility equipment is more rigorous than maintenance of commercial equipment,” Burrill affirms. “MRIs only function within very tight temperature ranges so there are significant operating restrictions on it. Or, if it’s any kind of sophisticated equipment with microscopes, any hospital facility manager will tell you that’s an area of the hospital where you have to be very, very careful about vibrations.”

Alternative asset class gaining share in the United States

The pending licences in Ontario, and similar growth of health service options through privately operated clinics in Alberta and British Columbia, represent a negligible niche of the market compared to the United States, where purpose-built, multi-tenanted buildings for medical services are an established alternative asset class for commercial real estate investors and owners/operators. Players in that market, such as Al Rabil, co-founder and chief executive officer, real estate, with the investment platform, Kayne Anderson, have enjoyed a national average occupancy rate of 93 per cent over the past 20 years.

“It’s an incredibly safe asset class that continues to be under-supplied as well as under-invested,” Rabil told an online audience during a recent webinar sponsored by IPE (Investment & Pensions Europe) Real Assets. “Fifteen years ago, 99 per cent of medical office in the U.S. was owned by health care hospital systems. It’s about 65 per cent today and I would dare to say that will probably drop down closer to 20 or 30 per cent in another 10 years because hospital systems own real estate by default not by desire.”

His company boasts one of the largest medical office portfolios in the U.S., with 768 buildings across 43 states, encompassing approximately 32 million square of space and affiliated with more than 170 health care entities. That’s geared to tenants Rabil defines as “higher margin businesses” providing services such as orthopedics, oncology, cardiology, neurology and diagnostics — resulting in what he terms “an operationally intensive asset class”.

“These are purpose-built buildings that house practitioners and bear no resemblance whatsoever to traditional office. Traditional office can’t generally be converted into medical office,” Rabil stressed. “This is a specialty area that requires specialist knowledge.”

While Canada continues to have a very different health care philosophy, requirements for facilities management expertise are similar on both sides of the border. So, too, are patient demographics.

“There are demand drivers for the next 25+ years in terms of an aging population,” Rabil submitted. “Just one quick statistic: the 65-and-older population requires approximately three times the number of doctor visits that the under-65 population requires.”