Healthcare Can Be A Good Candidate For Repurposed Space

/in , /by

When the topic of adaptive reuse of existing CRE properties comes up, the most typical angle is turning older office buildings into apartments.

While 2023 was a particularly active year, with 55,000 office to apartment unit conversions, according to Yardi’s Rent Café, that’s a small proportion of the 440,000 total units constructed by Real Page’s count.

Instead, developers, owners, and investors might look to other reuse, like healthcare. As that industry moves away from to outpatient care at distributed locations, it increasingly needs space. There are clinics and practices in spaces within shopping malls, freestanding retail locations, former general office buildings, and other repurposed spaces.

Becker’s Hospital Review recently looked at how Hartford HealthCare had used such properties as “a shuttered Blockbuster store, a vacant Bed Bath & Beyond and an old funeral home.”

“Though Hartford HealthCare’s approach to convenience is unique, the goal itself is shared among many health systems,” they wrote. “More organizations are zeroing in on outpatient, ambulatory care offerings as they look to retain hospital space for acute care. From freestanding emergency departments to grocery store walk-up clinics, health systems are testing new methods to expand their footprints (and appease an increasingly impatient patient before they make the switch to Amazon).”

As the Center for Health Design has noted, reuse of buildings can be more economical than trying ground-up construction, especially with the cost of land, materials, and labor in many metropolitan areas.

Appropriate buildings are not available in all locations, so repurposing is frequently not a viable alternative. Renovation costs can at times run more than new construction. There can be zoning restrictions or difficulties with community stakeholders. But there are also opportunities. Unoccupied buildings that have been sitting on the market are often available at discounted prices. If reuse of the infrastructure is possible, that becomes an additional source of savings. Often suitable buildings are available in prime locations that otherwise would be impossible to obtain.

As an article in Medical Construction & Design notes, there are additional considerations. One is visibility from the street. There should be easy access and sufficient parking. One similarity to repurposing space for logistics and warehouses is ceiling heights, “as the 10- or 11-foot ceilings common to strip-mall retail centers and commercial office buildings often don’t work for healthcare facilities.” But if the space has ceilings that are too high, like in a superstore type retail space, building interior partitions may be too difficult.

Consideration also needs a structural engineering analysis, including seismic loading and vibration. Existing elevators may be too small to enable travel by gurneys. Healthcare HVAC needs are more complex. The number of needed fixtures in restrooms may be three to four times as much as in a retail or office space. The need for greater scale is also true for electrical power.

 

Source: GlobeSt

What Drives Investors To US Healthcare Real Estate

/in , , /by

US Healthcare real estate continues to buck the work-from-home trend that has stifled growth in office properties in all major economies post-Covid-19.

This is due to a number of factors, including the one-on-one nature of medical care and long-term growth trends in the medical sector in the US, which ensure that rentals and capital values for MOBs stay relatively stable.

The medical office market has consistently seen annual rent increases since 2012. Favourable lease terms support minimal tenant turnover, creating steady rental cash flow, thus benefiting both vacancy and rent trends. According to a report from Colliers, despite the rise in average rentals in MOBs, vacancies have declined to 8%, contrasting with vacancies in the office sector in general, which stand at 15.1% and growing.

Rentals for traditional offices usually rise faster than those for MOBs in upturns but MOB rentals tend to be more resilient during downturns. Since 2000, growth in MOB rentals has averaged 1.8% a year compared with 1.4% average growth for traditional office space.

Advantages Of Healthcare Real Estate Over Other Property Investments

These advantages arise due to several underlying drivers of MOBs.

One is that since the Affordable Care Act was passed in 2010, the number of Americans with health insurance has risen steadily. These trends are expected to continue. In June last year, the Office of the Actuary Centres for Medicare & Medicaid Services forecast that from 2022 to 2031 average growth in national health expenditure at 5.4% would outpace average GDP growth at 4.6% in the same period, resulting in an increase in the health spending share of GDP to 19.6% in 2031 from 18.3% in 2021. By 2031, 90.5% of the US population will have medical insurance (in 2009 it was 85%).

Another driver is the ageing US population. The number of people aged 65 and older in the US has risen by about 3% a year over the past decade, and older people are generally more likely to use medical services such as routine check-ups, dental cleaning and visiting specialists – which are increasingly happening in medical offices rather than hospitals.

Healthcare real estate is different from most other types of office building in that healthcare tenants are readier to sign long-term leases because they build up a reputation with patients in their vicinity and often require significant set up costs especially in the case of imaging, laboratories, theatres, oncology and even dentistry. For investors in these buildings, long leases provide predictable cash flow, lower tenant turnover (and associated sign-on costs) and lower vacancy rates.

Longer-Term Outlook For Healthcare Real Estate

While demand for healthcare real estate is growing, supply is restricted as banks are pulling back lending in an environment of high interest rates and construction costs, which deters new developments. In this environment, opportunities also arise to buy distressed assets at attractive entry points that will deliver superior returns over the long term.

According to a survey of 37 institutional healthcare investors by US-based management consultants KaufmanHall, which was published end-September 2023, almost 90% of survey respondents reported that occupancy rates had improved or stayed the same over the preceding 12 months. 86% of respondents expected their MOB portfolios would perform similarly or better in 2024, and almost the same proportion expected annual rentals to rise by 3% or more for new or renewed MOB leases.

Although the majority of respondents said tenant improvement packages were having to become more aggressive to persuade new tenants to sign or existing tenants to renew, only 16% said they had had to offer inducements such as a rental-free period. KaufmanHall suggested demands for better sign-on deals probably reflected rising costs due to inflation rather than more fundamental shifts.

“In short, the survey results indicate a market with significant fundamental strength despite capital market challenges. Cap rates are up, meaning valuations are down, and transaction volumes are also down. Past experience suggests that this dynamic may offer a significant opportunity to buy high performing assets at attractive historic relative valuations,” KaufmanHall said.

Conclusion

Steep increases in inflation and interest rates over the past couple of years have demonstrated that property is not always a safe haven. Investors in over-geared properties, or those where lease agreements provide no protection against rising tenant costs, are feeling the strain. There are an increasing number of distressed sales in the general office market. This is an environment where investors should pick their sector very carefully. Well-maintained and well-tenanted healthcare buildings in good locations, managed by an experienced team, stand out in this market.

 

Source: BizNews

UCHealth’s Merger With A 100-Year-Old Pueblo Hospital Strengthens Its Dominant Spot In The Health Care Market

/in , /by

On a chilly morning last month, Darrin Smith, the president and CEO of Pueblo’s Parkview Health System, stood outside the 100-year-old system’s flagship hospital and gazed upon a bundled-up crowd.

“This is a wow moment,” Smith said. “This is a wow moment for Parkview and for the citizens of southern Colorado.”

The occasion was to announce that Parkview would no longer be an independent health care system. Instead, with Parkview’s absorption into the UCHealth system, it became the latest example of a trend of consolidation sweeping through the hospital industry, including in Colorado.

Both systems are nonprofit, so this was a merger and not a purchase. Terms of the deal were simple: As part of the merger, UCHealth committed to spending at least $175 million over the next 10 years for the benefit of Parkview, and it cut a $5 million check to the related Parkview Foundation to fund various projects and services in the community. The merger also provides additional strength to UCHealth, which has been expanding its footprint. Already, UCHealth is the state’s largest hospital system in terms of net patient revenue.

“It’s just the next step in an overall trend of the last 15 years or more of consolidation of hospitals and hospital systems,” said Allan Baumgarten, a Minnesota-based health care analyst who produces studies on the Colorado hospital market. “In the case of UCHealth, they’ve been expanding and basically establishing a presence certainly along the entire Front Range and a little bit into the mountains.”

Why Parkview Wanted The Merger

The two health systems first agreed to a merger letter of intent in October 2022, and Colorado Attorney General Phil Weiser signed off on the merger in May. But Judy Fonda, the chair of Parkview’s board of directors, said at last month’s ceremony to mark the transition that discussion around a merger with another health care system had been ongoing for quite a while.

“Our board has recognized for some time that the hospital would be strengthened by partnering with a larger health care system,” Fonda said.

The motivation for that can be found in Parkview’s balance sheets. Like many non-metro Denver hospitals, Parkview has struggled financially in recent years. The health system lost $11 million last fiscal year and $43 million the year before that, according to an audited financial statement filed with the federal Municipal Securities Rulemaking Board. The bulk of those losses came from operations — meaning the hospital wasn’t getting paid enough to cover its costs of providing medical care.

In 2022, Parkview closed its inpatient psychiatric unit, citing financial burden, according to The Pueblo Chieftain. In the merger notice it provided to the Colorado Attorney General’s Office, UCHealth pledged that Parkview will continue to provide maternity care and comprehensive women’s health care — something that’s significant given that those services are often targets for cash-strapped hospitals.

In talking about the merger, Parkview leaders often spoke of continuity — that Parkview would continue to exist to provide care, that it would continue to be a major employer and contributor to the region’s economy.

“Becoming part of the UCHealth family strengthens the care provided in our community, ensuring the patients and residents in Pueblo and southern Colorado will continue to have access to high-quality care,” Smith said during the merger ceremony.

Why UCHealth Wanted The Merger

In her remarks at the ceremony, UCHealth president and CEO Elizabeth Concordia likewise framed the merger in terms of patient care.

“We are very, very focused on making sure that Parkview thrives and that patients can continue to come here close to home for their care,” Concordia said.

But Baumgarten said the merger also strengthens UCHealth’s hand financially in the state.

“Having that geographic footprint and having that site gives them considerable bargaining strength when they’re negotiating with the major payors in the state,” Baumgarten said.

In other words, UCHealth can now negotiate higher prices with private insurers. This is one of the major concerns surrounding the consolidation trend. Studies have found that hospital consolidation drives up prices and insurance costs.

That’s one explanation for the merger craze in the hospital industry nationwide. By one analysis, there were more than 1,800 hospital mergers in the U.S. between 1998 and 2022, reducing the number of independent hospitals by 2,000. A Kaiser Family Foundation analysis found that, by 2017, two-thirds of hospitals nationally were part of health systems, up from a little over 50% in 2005.

In Colorado, UCHealth scooped up Yampa Valley Medical Center in Steamboat Springs in 2017. CommonSpirit Health acquired St. Elizabeth Hospital in Fort Morgan in 2022, and Colorado-based SCL Health merged with Intermountain Health the same year.

The exterior of the University of Colorado Hospital on the Anschutz Medical Campus in Aurora, photographed on Oct. 18, 2019. The hospital is the flagship of the UCHealth system. (PHOTO CREDIT: John Ingold, The Colorado Sun)

Baumgarten said the Parkview merger has other benefits for UCHealth beyond negotiating leverage. For one, as a system with teaching and research as part of its core mission, it now has access to more patients who can potentially be recruited for clinical trials. The merger also gives UCHealth specialists a larger patient base for referrals.

According to another document filed with the MSRB, Parkview saw roughly 150,000 outpatient visits and more than 68,000 inpatient days last fiscal year.

“Each of those patients has value to the UCHealth system,” Baumgarten said.

Standing outside his hospital last month, Smith, Parkview’s CEO, focused instead on the value the hospital’s new owner will bring to his patients.

“I am filled with hope for what lies ahead,” Smith said. “This partnership between UCHealth and Parkview heralds a new era of progress and innovation for Pueblo and southern Colorado.”

 

Source: Colorado Sun