Healthcare Developers Need Flexibility To Succeed

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The world of healthcare real estate has experienced more profound change in the past few years than perhaps any other sector.

Along with advances in medical technology, the transformation of healthcare delivery by the introduction of Obamacare has led providers to demand different types of facilities. And that means opportunities for developers and investors, if they understand the marketplace’s new realities.

The construction of massive hospitals is no longer wanted, experts agreed at Bisnow’s National Healthcare Midwest 2018 event in Chicago. BEAR Construction Co. project executive Victor Senese moderated a panel that examined what builders can expect in the future.

“We’re not building any new bed towers,” said Jeff Janicek, vice president of healthcare for Skender, a Chicago-based construction firm. That is primarily because healthcare systems are now required to improve efficiency, and many providers have decided they can achieve these goals by caring for people in their own neighborhoods. “There is now more of a focus on specialty groups.”

And with Amazon and other internet retailers putting pressure on traditional retailers, now is also the perfect time for developers to create new medical offices at low cost.

“There is a ton of retail space available,” Janicek said. “The anchor store in a local mall may no longer be a grocery.”

“The current demand is so great that many providers’ chief concern is getting new outpatient facilities up and running quickly,” BJC HealthCare Executive Director of Planning and Design Donna Ware said.

She estimated it typically takes about 18 months to design and complete a medical office building.

“We need to be faster than that,” Ware siad.

But like Janicek, she believes the real estate already exists if you look in the right places. Buildings recently occupied by groceries, even pizza parlors and other restaurants, can serve as outpatient facilities after a relatively modest amount of reconstruction.

“Other types of development will be more complex,” Environmental Systems Design Operations Director Randall Ehret said. “The Affordable Care Act started a mad dash to outpatient facilities. Many of these delivered basic care, but in the years since providers have also started establishing new intensive care units and other facilities that use more advanced medical technology. A lot of these are infrastructure intensive.”

The shift to decentralized facilities doesn’t mean developers will always fix up old grocery outlets. In fact, with so many medical professionals moving away from big hospital campuses, office buildings dedicated to healthcare are growing.

“Twenty-five years ago, the medical office building was between 10K and 20K SF,” HSA PrimeCare President John Wilson said.

These structures were occupied mostly by small physicians’ offices. Today, HSA sees a lot of demand for buildings between 150K and 200K SF, sometimes dedicated to one tenant, such as a hospital system. Chicago-based HSA recently finished the 109K SF Drexel Town Square Health Center, an outpatient and diagnostic center in Oak Creek, Wisconsin, a Milwaukee suburb, for Froedtert Hospital System and the Medical College of Wisconsin.

Wilson considers it a model for the future. Like most new facilities, it treats people with a wide variety of concerns, and includes a cancer treatment center, an emergency room and many other services..

But what the panelists most emphasized was the need for flexibility in design. The clients for the Drexel building, for example, originally wanted about 75K SF, but after a deeper evaluation of the community’s needs, ended up asking for 109K SF..

“If demand for its services intensify, the building can be expanded even further to about 130K SF.” Wilson said “It has to be almost like an accordion.”

“Healthcare needs are always changing and new technologies are always on the way,” Ware added “so developers need to think ahead.”

Ehret said his firm puts a lot of thought not just into what a particular space needs today, but also what it might need tomorrow. A neighborhood’s pediatric unit may get replaced by a senior care provider as local demographics shift. New machines that did not exist when a room was designed may need to be squeezed in.

“And even though flexibility can carry a pretty hefty price tag, in the end healthcare providers will appreciate it,” Ware said.

 

Source: Bisnow

Healthcare Gets A Retail Makeover

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MOB Cap Rates Compress, Stabilize

According to a recent report by Newmark Knight Frank, during 2017, medical office properties across the nation valued at $13.3 billion changed ownership, well above the $10.8 billion in 2016. 2018 has seen a decline in national sales volume with year over year total sales down by 17 percent (representing 164 properties) and volume in terms of dollars down by 18 percent, or $1.8 billion.

Also in 2017, according to Newmark, pricing hit an all-time high in with an average price of $295 per square foot, an increase of 16 percent over 2016’s average price of $255 per square foot. Indeed, medical office assets have grown an average of 7 percent each year over the past five years, with an overall increase of 55 percent since the recent lowest point in 2009. This year has seen the price per square foot of assets moving up since 2017, currently averaging $299 per square foot, the brokerage reports. Cap rates hit an all-time low at 6.66 percent in 2017, finishing below 2016 cap rates of 6.74 percent. Over the past five years, cap rates have compressed at a rate of 22 basis points per year.

Newmark’s research also reveals that given the increasing 10-year treasury rates in 2018, the days of cap rate growth are likely over, though cap rates have remained relatively stable in a raising interest rate environment; both 2017 and 2018 hovered around 6.6 percent for the same time period year over year. Likely, as further treasury rates increase, we will see cap rates beginning to move back toward 2016 levels, according to the firm.

Public REITs Dominate Deals

Private investors were the largest sellers of medical office assets in 2017, accounting for 47 percent of dispositions and 35 percent of purchases by dollar volume, according to Newmark Knight Frank. Users and others, including healthcare systems and other providers, accounted for 12 percent of dispositions and 9 percent of acquisitions.

2018 has seen a number of hospitals purchasing back buildings, the research shows, and it is possible that we will see this trend continue if rental rates continue to increase along with construction costs and changes in accounting regulations. Publicly traded REITs were the largest buyers of medical office assets in 2017, accounting for acquisitions of $4.8 billion, or 36 percent of all acquisitions.

Much like the U.S. trends, the Northeast is experiencing a drop in the total number of buildings sold from 119 in 3Q 2017 to 106 through 3Q 2019. However, overall volume in terms of purchase price has increased in the Northeast, bucking the national trend through 3Q 2018, according to Newmark’s report. Volume in terms of dollars has moved up for the same time period from $1.2 billion in 2017 to $1.9 billion in 2018. With 4Q historically seeing some of the highest volumes, the Northeast is on pace to have one of its better years in terms of total volume by price.

Newark Knight Frank experts also note that the Northeast has seen similar national sales trends with sales-to-date trading above the national average at $320 per square foot, up from $305 in 2017. Cap rate trends in the Northeast are also in line with national trends, as 2018 cap rates remain unchanged hovering around 6.9 percent for non-portfolio sales.

Lancaster General Health is a prime example of a deal in the Northeast, according to Newmark. The hospital is a member of the University of Pennsylvania Health System (Penn Med), a not-for-profit health system with 786 licensed beds. In late September, Lancaster closed on a property located at 950 Octorara Trail in Parkesburg, Pa. While the deal is not notable for its size or its value, it is notable because of what it represents, the report maintains. There has been a trend emerging in 2017 and 2018 where hospitals are purchasing buildings or purchasing back buildings that have sold. With changes to FASB and how leases will be treated, as well as the rising cost of lease rates and construction costs, an emerging trend has formed where hospitals are choosing to own rather than capitalize their assets. Lancaster General purchased the 41,000 square foot building for $230 per square foot.

M&A Activity Heating Up

As medical office remakes retail space and adopted a retail formula, last year, we also saw the beginning stages of major consolidation and change, according to Newmark Knight Frank.

Large health systems are merging together to enter new markets or increase market share in existing markets to grow scale and leverage operations for economic efficiency. Smaller health systems are joining larger health systems that have capital and resources to achieve economies of scale, Newmark reports.

Similar trends are taking place in 2018, as 30 health system and hospital deals were made in the first quarter of 2018, which is 11 percent higher than 2017, according to a report by Kaufman Hall & Associates. The overall themes of these health system mergers are fueled by lower reimbursements, decreasing patient admissions and readmissions while providing a lower cost of care in the community. The impact of these mergers will see an effect in the real estate market in a variety of ways. More capital and scale could result in more development opportunities, on the other side redundancy of space could see consolidation efforts to optimize the outpatient footprint in the market. Data around each health system’s locations will be critical in understanding what real estate initiatives will be a catalyst for contributing to success of the merger.

Mega Deals to Watch

The two mega-deals in process, CVS-Aetna and Cigna-Express Scripts, and increased private equity investments will continue to shape and transform how healthcare is delivered to the market, Newmark Knight Frank reports. For example, The CVS-Aetna merger will provide a new model for the healthcare industry with CVS offering primary-care services and medical follow-ups directly from the drugstore. The merger is also a strategic move for CVS to stay competitive with Amazon, which is increasing its presence in the healthcare industry, according to Newmark experts. Also, many health systems are partnering with CVS and Walgreens in their markets to provide primary care and urgent care clinics close to their patient’s homes.

As for clinics and physician groups, according to Newmark, 2017 saw a 37 percent increase in physician-owned practices transactions compared with 2016, Newmark research shows. Similar trends are apparent in 2018 activity. Many physician practice transactions are backed by private equity firms. Having access to capital for operational and technology needs allows practices to position themselves for future growth. Some physicians find it more appealing to sell their practice to a private equity firm versus selling to a hospital. A part of the appeal is that physicians don’t lose complete ownership or control, and there are attractive economic benefits, according to Newmark. Attractive economic benefits include ownership of the management services organization as well as potential disposition of real estate assets to REITs or other institutional investors if owned by the practice group, the brokerage maintains.

Northeast M&A Deal Highlights

The northeast region is following similar healthcare mergers and acquisitions trends as the entire United States, according to Newmark Knight Frank’s report. The majority of the activity lies in the states of Pennsylvania with 17 transactions; New York with 13 transactions; New Jersey with 13 transactions; and Massachusetts with 10.

The merger of Beth Israel Deaconess Medical Center and Lahey Health in Massachusetts, for instance, was announced in 2017 and is currently in the regulatory approval phase, Newmark notes. The new proposed health system would include 13 hospitals, over 800 primary care physicians and more than 3,500 specialists across the state. The system would represent a competitor to Partners HealthCare which is the biggest health system in the state with 10 hospitals and $12 billion in annual revenue. Newmark research also points out that the intention of the merger will improve patient care in the community while also containing rising healthcare costs the consumers are experiencing. Real estate activity could play a role in the effort to reduce cost by shifting care to lower cost settings, as well as evaluating overlapping or redundant point of care and making the health system footprint more optimal.

Another deal highlight that’s relevant to medical office trends is New MainStream Capital’s investment last year in Omni Eye Services, which is based in Iselin, N.J. New MainStream Capital (NMS) is a private equity firm that specializes in strategic investments and leveraged buyouts. The investment in Omni Eye services will provide additional capital to grow organically and through acquisition as well as expanding resources and capabilities to patients, according to Newmark. Growth will include de novo office openings, provider recruitment and new acquisitions. In 2018, Omni Eye Services acquired Phillips Eye Center (Elmwood Park, N.J.) and Kremer Eye Center (King of Prussia, Pa.) to continue expanding its service offering and referral optometric practice in the Northeast.

 

Source:  Commercial Observer

Top 3 Trends Driving This Era Of Hyperactive Mergers & Acquisitions

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It seems as if almost every other week a new healthcare megamerger is announced that is supposed to transform the industry.

From Walmart-Humana to CVS-Aetna – to the recent announcement in the Dallas market around Baylor, Scott & White and Memorial Hermann – the continuous message is that disruption has arrived and the walls of traditional M&A are falling down. Last year, there were 579 deals for U.S. healthcare targets, the second highest total on record. Why is healthcare M&A so hot?

In the healthcare industry, companies are using M&A as a strategy to adapt and respond to a rapidly changing industry environment. Faced with a shifting technological landscape, they are looking for outside expertise and systems to remain competitive. And in private equity, which is investing in healthcare at a rapid rate, attractive margins and profitability are driving them to certain healthcare sub-sectors.

A recent survey of 100 healthcare M&A dealmakers uncovered several insights to understand what’s going on in this market. These are the top trends.

1. Economic conditions are ripe for M&A, but attractive healthcare targets are scarce

A strong economy and low interest rates have significantly improved access to capital. Many companies have paid down debt, stockpiled cash, and are now in a position to spend. From a dry powder position, conditions are ideal for healthcare organizations to evolve through acquisitions, though increased access to capital has created more competition and pushed multiples to all-time highs.

As a result, the shortage of financially attractive acquisition targets is currently the biggest challenge in healthcare M&A. These challenges – high valuations, excessive competition and short timelines for due diligence – have created a seller’s market. The dearth of acquisition targets is further exacerbated by the fact that there simply aren’t many healthcare companies with updated technology/IT systems and additional investment must be factored into the deal model.

2. Heightened competition and prices are spurring healthcare companies to joint ventures

Amid heightened competition and pace of transformation, healthcare companies are turning to joint ventures and alliances to expand into new markets and grow top-line revenue more quickly — and with less hassle than pure M&A. An overwhelming majority of our respondents (79 percent) told us they expect to pursue alliances, partnerships, and joint ventures in the next 12 to 18 months.

While alliances come with their own set of challenges, they allow organizations to realize value earlier by avoiding some of the incredibly challenging and time-consuming aspects of M&A deals, such as fully integrating infrastructures, cultures, and technology. JVs can also be a means of accessing new technology. The most prominent benefits of partnerships and joint ventures, respondents told us, is the opportunity to access outside technology or expertise (57 percent said this). In a world that increasingly favors a digital-first approach, quicker access to new technology could be game-changing for some organizations.

3. Technology is both complicating things and presenting new opportunities

Technology has emerged as one of the central forces – if not the most important force of all – shaping acquirers’ M&A strategies in healthcare. An overwhelming majority of our survey respondents, 93 percent, say technology and systems integration challenges are creating added complexity in the healthcare industry. Also, more than a third of our survey respondents (36 percent) said the fast pace of technological change would pose the greatest challenge to healthcare companies over the next one to three years.

In the context of M&A, this raises the importance of technology and digital due diligence in the targeting phase and makes it critical to plan how acquired companies will be able to adapt, or disrupt, using technology going forward.

To be sure, buyers said they are looking for acquisitions capable of evolving with the rapidly shifting environment – or, those capable of proactively transforming that environment themselves. In that sense, the emergence of new digital tools is seen as a prime opportunity: 48 percent of respondents said one of their top two strategic drivers for making healthcare acquisitions was the chance to disrupt incumbents using technology. And healthcare IT was the subsector most likely to be invested in, prioritized ahead of providers, staffing, and even home health.

A wide range of technologies is seen as having potential to advance the industry. Among our survey respondents, the technologies deemed most attractive were mobile tools (49 percent), data analytics capabilities (37 percent), and the use of blockchain (30 percent). Wearables, sensors and trackers (25 percent), and telehealth tools (20 percent) – all of which intersect with the mobile space – are also drawing interest.

Conclusion

Technology comes with its fair share of challenges, especially integration in a healthcare setting. But it can also fuel an organization’s competitiveness and ability to adapt to disruption in the future. Read the full report, “Reshaping Healthcare M&A: How Competition & Technology are Changing the Game,” to access the complete findings.

 

Source: DBJ