Recent 26,000-square-foot lease by Harvard Eye Associates at the once-struggling Saddleback Medical building displays Colliers’ knowledge of both the local market and big picture healthcare trends
Southern California has been experiencing a seismic shift — and not just earthquakes. In fact, the entire healthcare real estate world has been experiencing a jolt that’s shaking up the traditional lease patterns when it comes to medical office buildings (MOBs). Healthcare delivery is an ever-changing landscape, and once-prevalent independent private practice providers are now getting swallowed up by larger health systems and entities. This phenomenon has caused a radical change in the tenancy roster of your typical MOB. John Wadsworth, a senior vice president with Colliers International in Irvine, Calif., is constantly responding to such rumblings in the dynamic SoCal marketplace by fine-tuning the proper strategy to position properties and targeting the perfect prospects.
Such is the case with the 136,000-square-foot Saddleback Medical building at Saddleback Memorial Medical Center, a newly renovated, best-in-class MOB adjacent to one of the premier hospitals of Orange County. Mr. Wadsworth is a founding member of Colliers Healthcare Services, a highly specialized service line within Colliers that provides real estate solutions to the healthcare and healthcare real estate industries. He and his team have enjoyed a longstanding relationship with the owner and manager of the five-story building, Greenlaw Partners, with whom they have worked on various projects.
“In today’s world, the demand is bigger footprints that are more efficient and cost effective to operate. There’s not the abundance of smaller, private practice type tenants,” Mr. Wadsworth explains. “We leveraged the big block of space to the larger providers in the market. That concept fits very well into how healthcare services are delivered in 2019 and post ACA.”
Meeting the needs of existing tenants is one thing; creating opportunities for new tenants is another. This is where the Colliers difference really came into play, resulting in the recent news-making 26,000-square-foot lease to Orange County ophthalmology leader, Harvard Eye Associates. “Harvard Eye was a prospective tenant from the immediate marketplace. They needed to expand. They could expand in the building they were in, but not to the extent that Saddleback could afford them, and the expansion would not have been contiguous,” Mr. Wadsworth says.
The Cinderella story of the Saddleback Medical building is a big part of the success. “On this campus, there are three MOBs that really matter. Saddleback Medical building is really the best based on size and location, but it wasn’t always the case,” Mr. Wadsworth reveals. “Everyone loves new and shiny. This MOB used to be ‘the dog,’” he notes. While it was an “A location” — on campus, 250 feet from the hospital, with access to the U.S. Interstate 5 freeway — it had vintage 1980s construction. On top of that, upkeep and property management had been neglected. Consequently, it sank to 45%occupancy from 95% in a period of about three years.
The issues of deferred maintenance were overcome when the building recently underwent extensive, game-changing interior and exterior renovation, including: major lobby and common area upgrades; modernized heating, ventilating and air conditioning (HVAC), mechanical, electrical and elevator systems; new fire life safety (FLS) alarm and sprinkler systems; a new signage and wayfinding; and updated landscaping. But while those capital improvements spruced up the building itself, the leasing team would also need to spruce up the building’s image — changing how it would be perceived in the marketplace. Highlighting the many positives of the now-restored building, the Colliers team went to work by making the space as attractive as possible in this new world of larger, non-private/independent healthcare providers. “We sold the fact that we were on-campus, next door to a great hospital system and directly adjacent to Laguna Woods Village, a 55+ retirement community,” Mr. Wadsworth explains. “Now that the building itself is fixed, it’s sent a breath of fresh air in the market.”
In addition, Mr. Wadsworth’s 26-plus years of experience enabled him to readily identify and recommend new opportunities that a less experienced broker might have overlooked. “The real estate opportunity really sold the deal because it unlocked an expansion opportunity that wasn’t obviously there,” he continues. “On the third floor, we suggested to the owners the concept of assembling a large block of space. The third floor wasn’t completely empty. It was occupied by some legacy tenants. The strategy was to go after the ‘large block of space’ opportunity. “And so, we made room for a large tenant, which the landlord agreed to and agreed with. We returned that space to white box shell condition which allowed prospective tenants to see the potential vs. the potential of third generation, tired space. We aimed to eliminate as many potential barriers as possible.”
Acting on this strategy paid off. Reconfiguring the third floor of the Saddleback Medical building created the largest block of existing and contiguous medical office space available in Orange County, creating a unique opportunity for prospective tenants. The Harvard Eye lease brings the tenancy in the Saddleback Medical building up to 75%now. And according to Mr. Wadsworth, there are pending deals that will soon raise that percentage up to more than 90%. “We are in lease talks with other significant tenants and have another vital turn to go. But, if it goes the way I think it will, this asset will be in great shape,” he says.
And what about those legacy tenants on the third floor? Were they upset at being uprooted or displaced? It seems, according to Mr. Wadsworth, the opportunistic stars aligned for them, too. “Our legacy tenants are happy with their new space which really started with the overall building renovation,” he opines. “We only had a handful of tenants on this floor. And as I explained to the landlord, we ought to look for ways to wipe clean any obligation. The landlord completely bought into that strategy and committed resources and money to get it done. As a result, everybody was aligned. The brokers, the asset management and the ownership all bought into the vision, which was critical.” The way the market-wise, creative leasing strategy for the Saddleback Medical building delivered the Harvard Eye Associates lease — with more tenants soon to come — demonstrates the Colliers difference. At a time when seismic shifts continue in the healthcare industry — not just in California, but nationwide — developers, owners and tenants should turn to trusted advisors such as on the Colliers Healthcare team, for welcome stability.