By Sam Sarbacker, Vice President of Development, OGA

The onset of COVID-19 forced workers to stay at home and accelerated the adoption of remote work technology platforms such as Zoom and Microsoft Teams. Seeing that workers were able to be productive at home with the use of these tools, many companies seized the opportunity to lower their overhead and let workers opt to stay at home permanently. Couple that with the five million workers who left the workforce in the past two years, and we are left with a diminished need and subsequently reduced demand for commercial office space. However, if we think creatively, there are multiple uses for that vacant space and the healthcare industry is a prime target.

How did we get here?

Employers in Nashville and throughout the country were locked into long-term leases prior to the onset of the pandemic. As leases expire, employers will be looking for less space than originally leased, or some may elect to abandon leased space altogether and go fully remote. The vacancy rate in Nashville rose from 17.9% in Q1 2022 to 19.3% in Q2. Despite strong demand from out-of-state firms relocating to the area, vacancy rates are likely to hold steady or increase as leases continue to expire and many companies reduce their need for office space.

Healthcare providers can maximize the opportunity

Initially, these factors seem to paint a stormy picture, but in fact, it is generating an opportunity for healthcare providers. Significant vacancy rates are painful for landlords, causing an increased willingness to be flexible and resourceful in procuring tenants. As a result, landlords will be more likely to accept lower lease rates or consider lower disposition costs in order to fill or sell their buildings. Inflation and high construction costs, in tandem with rising interest rates and reduced demand, has put pressure on new construction rental rates from all angles. The upward cost trajectory on new construction and the downward economic pressures on existing office space are generating a unique chance to lower costs via utilization of existing buildings.

Should they find office space that will suit their needs, it’s true healthcare providers will still pay market rate for tenant improvements to their newly acquired property, but the existing site and building envelope should be considerably lower cost than new construction. This is a sizable advantage because those two elements can represent anywhere from a third to half of the total cost of a new project.  

The increased availability of office space coincides favorably for healthcare providers as they look for space to extend their care outside the four walls of the hospital. Repurposing existing space in the current environment is not only less expensive, but it is faster to market, allowing organizations to expand their footprint and patient base more quickly.

The site and shell components for an existing building are already in place and available for use, reducing the need for construction materials that are still scarce and expensive and decreasing the likelihood of a delayed opening. Healthcare organizations can easily accelerate their project timeline by eliminating the need to develop the site or construct the building envelope and positively impact their bottom line -- think less construction period interest, less contractor overhead and less lost revenue waiting for the space to open.

Repurposing office space is advantageous, now is the time

Office space can effectively be repurposed for healthcare applications ranging from lab facilities to inpatient behavioral health treatment centers; from ambulatory surgery centers to urgent care centers, to name a few.

While transforming underutilized office space into a healthcare facility is a great opportunity, healthcare is unique and construction requires special planning, regulatory and licensing knowledge, so securing a developer partner that understands the industry is critical to a project’s success. Like any industry, healthcare providers are interested in expanding their footprint while reducing total project costs, so looking for opportunities to repurpose an existing space in this current climate can be a smart solution.

Sam Sarbacker is Vice President of Development for Oman-Gibson Associates (OGA), a full-service health care real estate and development firm based in Nashville, offering development, project management, acquisition, site selection and lease consultations services. OGA customers range from physician groups, behavioral health groups and national surgery centers to major hospitals and health systems.