Healthcare Real Estate Developers Are Adapting To A Changing Landscape

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Anyone who has kept an eye on the healthcare real estate sector over the past several years is aware of the property type’s reliability amidst increasing economic uncertainty, which has resulted in growing interest among investors.

However, for what has become one of the hottest investment sectors in recent years, transformations underway within the healthcare industry will bring changes to the asset class over the next decade.

The market fundamentals are easy to understand. According to a recent report from Real Capital Analytics, United States-based healthcare real estate assets account for over $1 trillion in market value. Physician visits by baby boomers are expected to nearly double in the next decade; it is also projected that by 2060, one in four people will be over 65 years old. These factors make it clear that this already large market is positioned for continued growth.

However, in crowded regional healthcare markets like Philadelphia, which features several large competing healthcare systems and a variety of growing specialty networks, that growth will not just be more of the same.

Changes in Delivery

Traditionally, the American healthcare delivery model centered on hospitals, which meant that medical office buildings tended to be clustered near hospitals and other large inpatient medical facilities. These facilities were easy for doctors to access and provided enhanced services close to individuals’ primary points of care.

In recent years, the healthcare delivery model has undergone a dramatic shift, with outpatient and ambulatory facilities becoming primary points of care. This trend has unfolded almost simultaneously with the wave of consolidations and mergers that has swept through the industry in the last decade.

Working in tandem, these two trends have created a healthcare industry that is dominated by large healthcare systems searching for enhanced geographical footprints to better and more conveniently meet the health and wellness needs of the populations and communities they serve.

Key User Demands

Real estate plays a key role in a healthcare system’s ability to make quality care more accessible. As such, the demand for well-located, quality space continues to rise, attracting a greater number of investors than in prior years

Although location still plays a vital role in healthcare real estate investment, the criteria behind what makes a location desirable has shifted. Since medical buildings no longer need to be immediately proximate to hospitals, today’s best locations are those where people already are living, shopping and working. Whether this comes in the form of a purpose-built medical office building in the heart of a growing community or a retail location next to popular cafés and shopping destinations, today’s healthcare consumers prioritize convenience above all else.

Visibility is also playing a larger role in site selection for new healthcare projects. Expanding networks want their names out in the market, and they want people to be aware of their presence in the local community. This “retailization” of healthcare is highlighted by many medical office tenants’ requirements for signage and high visibility in their search for space.

Flexibility is also a main factor in today’s marketplace. Physician groups and healthcare systems require spaces that can accommodate the shifts in how care is delivered while also provide the flexibility to cater to telemedicine and other technologies that are transforming how people access care.

Project Example

Just outside of Philadelphia in Washington Township, New Jersey, the 35-acre Washington Square Town Center development addresses all of the factors discussed above.. With an increasingly cross-generational population and changing delivery model, medical space was a key component to the mixed-use project.

Working closely with Rothman Orthopaedic Institute, one of the region’s largest independent orthopaedic practices, a 40,000-square-foot, state-of-the-art medical office building was created at the gateway to the community that includes multifamily housing and retail options.

The healthcare trend has even been extended to the project’s residential component, with a 110-bed assisted living facility currently under construction to join the 330 residential apartments and 100 townhomes on the property. Today, the Rothman Medical Building stands fully occupied, and the retail component has seen tremendous interest from both medical and traditional retail tenants.

Not only do projects like the Washington Square Town Center allow the community to enjoy increased access to diverse medical services in a variety of settings, they also provide growing regional networks with a highly visible footprint in new communities to foster their continued growth.

Looking to the next decade, the healthcare real estate industry is positioned for tremendous growth. Leading this growth will be the developers and investors who truly understand the needs of an increasingly consolidated healthcare industry and can creatively imagine projects to meet both its short- and long-term needs.

 

Source: REBusiness Online

Healthcare Providers Making The Old New Again

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Healthcare providers are continually seeking cost-effective ways to deliver care. As construction costs rise, some are choosing to repurpose facilities instead of building new ones.

One example of this is the Texas Children’s Hospital, located in the Texas Medical Center in Houston. The hospital is repurposing seven floors of its West Tower, a 20-story hospital building that went through initial construction in 1991 and had additional floors added in 2001.

The seven floors being redone were vacated when Texas Children’s Hospital relocated some services to its new Legacy Tower in 2018. Two of the floors were inpatient nursing units. In planning the backfill of the seven vacated floors, those two floors were proposed for additional nursing units to address inpatient needs, and repurposed into “new” nursing units. The refresh of those two particular floors allowed the hospital to upgrade technology, repair aged fixtures and materials, implement updated signage and artwork, refresh the look and feel of the unit, and focus on medical specialties in need of beds.

“What we’re finding is, we’re doing this repurposing at half the cost of what new would be,” said Texas Children’s Hospital Vice President of Facilities Planning & Development and Real Estate Services Jill Pearsall, who was one of the panelists at Bisnow’s National Healthcare South event Feb. 13. “The other five floors are being planned for a variety of other uses, some for direct reuse, while others will receive significant demolition and renovation.”

New construction is expensive, and that cost is often passed onto consumers. Transwestern Executive Vice President of Health Advisory Services Justin Brasell said that only some end users can afford a new building, as rents have to reflect the returns required by new owners to take on the risk of building a new project. Brasell said he has seen many older buildings being repurposed, often in less urban areas with more green space. Those buildings tended to have a less efficient build-out, and part of the repurposing involved utilizing space that might otherwise be wasted, such as large atriums.

The challenge of reducing operational costs and construction costs while providing high-quality medical care has been an ongoing trend in healthcare for years, but has reached a new level of intensity, according to Baylor Scott & White Chief Innovation Officer LaVone Arthur.

“When we talk about the reduction of cost, from a provider side, we are every day trying to squeeze out every penny we can from our cost,” Arthur said. “We are just now taking control of trying to manage the cost to our consumers.”

The panelists also discussed other trends in the market, including the decentralization of healthcare. More health systems are redirecting patients to facilities located in neighborhoods to treat lower-acuity cases. Pearsall noted that an urgent care in a community setting does not have to be the same quality as a hospital. She said it is important to manage both internal and consumer expectations of how much investment should go into certain facilities.

“We are really working to develop the right facilities, in the right location at the right cost,” Pearsall said.

The trend of decentralizing care has moved further away from traditional hospitals, with technology developing to allow patients to access care in their own home, through methods such as telemedicine.

“Every health system out there is actively pursuing virtual options, because it’s a lower-cost option, and it also is providing access,” Arthur said.

The technology and infrastructure demands in hospitals and healthcare spaces have also changed over time. Everybody wants emergency power, as well as extensive redundancies built into a system to improve reliability.

“The demand for low-voltage infrastructure in new buildings is also significant,” McCarthy Building Cos. Vice President Preston Hodges said. “Nearly every hospital in the Texas Medical Center, and across Texas, is building or developing something right now. Just about every institution has a large initiative either underway in design or underway in construction.”

As a result, the demand for high-quality contractors and subcontractors has become fierce, with healthcare providers competing for labor earlier than ever before.

“These clients are going to secure teams earlier and earlier,” Hodges said.

With empty land in the Texas Medical Center at a minimum, and needs constantly evolving, Hodges believes demand for backfill and renovations will only grow.

When it comes to new design and new concepts, Arthur said she is most concerned with flexibility and creativity. Arthur points to the examples set by nontraditional players in the healthcare field, like Amazon and Google, and how the industry was closely watching what those technology leaders were doing in an attempt to keep pace.

“Healthcare is changing very quickly, and I think we are on an unprecedented path,” Arthur said. “If you’re building a traditional hospital today, something’s wrong.”

 

Source: Bisnow

Borrowers And Lenders Are Adapting To The Hot Heathcare Real Estate Market

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When it comes to financing medical office building (MOB) acquisitions, the cost of capital is not always the most important factor in choosing a lender.

“In fact, when a nine-property MOB portfolio in the Atlanta area changed hands in a sale-leaseback transaction in late 2019, the borrower on the $25 million loan chose to go with a lender that did not have the lowest cost but that knew the tenant best so that they could make sure that everything would go quickly through due diligence and get to closing and not hit any bumps along the way,” said Sabrina Solomiany, a first VP, US Healthcare Capital Markets Debt & Structured Finance with CBRE Group Inc. (NYSE: CBRE), who helped line up the debt for the buyer. “It was very competitive, but ultimately we went with Synovus, with part of the reason being that even though they did not necessarily have the most competitive terms, they actually had a banking relationship with the physician group.”

Ms. Solomiany made her remarks during the recent Revista Medical Real Estate Investment Forum 2020, held Jan. 27-29 at PGA National Resort & Spa in Palm Beach Gardens, Florida. She was part of a panel session titled, “Debt Outside the Box: Construction, Mezz & Alternative Asset Classes.” Joining Ms. Solomiany on the panel were: Natalie Sproull, VP with Capital One (NYSE: COF), as moderator; Jim Barnes, director of Healthcare Specialty Lending with Synovus Financial Corp. (NYSE: SNV); and Andrew Smith, managing director with Los Angeles-based Kayne Anderson Capital Advisors LP.

During the session, the panelists discussed some of the latest trends in healthcare real estate (HRE) financing when it comes to acquisitions as well as development deals. Part of the discussion focused on how and why certain HRE deals get done.

“When it comes to construction financing of medical projects, people are often surprised that the first few things I consider are not always financial in nature, said Mr. Barnes of Columbus, Ga.-based Synovous. “I like to look more at the expertise of the developer,” he said, “making sure that the developer really has a deep experience in delivering medical properties on time and within budget. This has become much more important recently with the trend toward greater institutional equity investment and, for the most part, the institutional investors having much less expertise in construction than the developers. Secondly, the firm looks for strong sponsorship either from a hospital system or a longstanding, stabilized private practice – something that will create an anchor within the property.”

 

Source: HREI