Healthcare Real Estate Gains Steam As Possible Downturn Nears

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Professionals involved in owning, developing, leasing or financing medical office buildings (MOBs) often point to the Great Recession as an instigator for new investors to become interested in the property type.

To be sure, the healthcare real estate (HRE) space and MOB development and investment certainly suffered during the big downturn of 2007-09. However, thanks to other, unrelated circumstances, existing properties performed well, retaining their physician and health system tenants and, as a result, maintaining their values.

With many economic and business pundits predicting that the country’s economy is once again heading toward a  downturn – albeit not as severe as the last one – the recession-resistant qualities of MOBs are once again piquing the interest of a wide range of would-be investors as well as providing a sense of comfort for those already involved.

A panel of well-known, experienced HRE professionals recently explored this topic, as well as a host of others, while discussing the short- and long-term outlook for the sector during a panel session at the recent InterFace Healthcare Real Estate Conference in Dallas. The panel, titled “What is the Short- and Long-Term Outlook for Healthcare Real Estate?” was moderated by Murray W. Wolf, publisher of Healthcare Real Estate Insights.

The panelists comprised: Lee Asher, vice chairman of the U.S. Healthcare Capital Markets team with CBRE Group Inc.; John Pollock, CEO of San Ramon, Calif.-based Meridian; Gordon Soderlund, executive VP, strategic relationships with Charlotte, N.C.-based Flagship Healthcare Properties; Jonathan L. “John” Winer, senior managing director and chief investment officer with White Plains, N.Y.-based Seavest Healthcare Properties; and Erik Tellefson, managing director with Capital One Healthcare Financial Services.

As the session kicked off the conference on Sept. 17, one of the panelists, Mr. Winer of Seavest, said that during “recessions, healthcare facilities, in particular those with the characteristics that we all know about, do just fine.” But he added that if there is a caveat to that perspective. If a recession is indeed eminent, he cautioned, investors should make sure not to acquire assets with only short-term prospects for success, be they aging buildings and/or those that will not provide flexibility as the healthcare delivery model changes in the future.

“The assets most of us are going to be looking for are newer assets that we’re very comfortable with as a long-term hold; we’re not looking for short-term turnaround plays,” Mr. Winer said. “But otherwise, I think we’re in good shape and I think businesses (in this sector) are in good shape, whether a downturn occurs or not.”

Other Panelists Agreed

“We operate a private REIT (real estate investment trust),” said Mr. Soderlund of Flagship, “and so we have a very long-term view of holding assets, and we are becoming more aggressive, reasonably aggressive in pursuing acquisitions. We want to build our portfolio and we … figure out what we should (hold on to and) not hold on to. We’ve been through that process. There’s a continuing imbalance of supply and demand, and until that changes, and until interest rates maybe go in a different direction, we’re all in a relatively safe place right now.”

Mr. Pollock of Meridian, which often redevelops value-add medical facilities, noted that during a recent meeting with investors from various sectors of commercial real estate, he was “peppered” with questions about HRE.

When he told that group that the tenant retention rate in medical facilities is often in the 85 percent to 90 percent range, “they were like, ‘You’re kidding!’” Mr. Pollock said.

“In general office, it’s 70 percent across the board,” Pollack said. “I think what we’re all seeing is that investors who are in industrial, multifamily and office are now asking more about healthcare. So we’re seeing pension funds that haven’t been in the sector, institutional investors who haven’t been allocating to the space with the theme being that medical office assets are performing better and they’re readying, maybe not for an economic downtown, but toward diversifying their investor base,”

 

Source: HREI

When It Comes To Healthcare, CRE Is Driven By Data

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Understanding and analyzing data is especially important in the healthcare industry, where reimbursements are often tied to the percentage of square feet dedicated to patient care.

For commercial real estate, that means healthcare providers can now be more judicious when it comes to design and space allocation.

GB Architects principal Lois Broadway says clients are now looking at local demographics to determine the average customer age, and also using data to determine the most likely type of care that its patient base will require.

“We are working with a client that started a full assessment on their local demographics to determine ages, admissions into local hospitals and what they need while there,” said Broadway, whose colleague Melissa Kelii will moderate a panel at Bisnow’s National Health Series: Pacific Northwest.

This data drives decisions, like whether a hospital should include more maternity units or make more space for geriatric specialties like cardiology and knee replacement specialists, she said. Hospitals should also consider how much time they allow patients to recover. For example, some hospitals let patients remain in the hospital for three days, while others end the visit after 24 hours.

“Adding to the issue is that fact that Medicare and Medicaid reimbursement is based on the percentage of the facility that provides direct patient care,” Broadway said. “They look at the whole picture and then give you a facility charge,”

So if 60% of the facility is dedicated to patient care and 30% is dedicated to secondary patient support space, such as storage areas, the provider will be reimbursed at different rates for the different uses. Areas like parking garages, which are necessary but not related to patient care, are not reimbursed at all, she said.

All this makes maximizing space a smart financial decision. It is particularly important to find ways to minimize the amount of square footage dedicated to data storage. Often, data is now being stored off-site through cloud providers. The healthcare-focused cloud computing industry is set to hit $40B by 2026, according to a report by Acumen Research and Consulting.

“The cloud can reduce IT costs, provide quick access to business applications and forms and provide medical teams with on-demand patient data from anywhere,” Qentelli VP and Head of Innovation Vishnu Nallani told Bisnow. “However, as data storage moves to the cloud, healthcare companies must be careful to secure it and ensure the privacy of their patients. Data breaches cost healthcare organizations millions of dollars each year, because patient data is seen as extremely valuable on the black market. Having security features in their cloud like perimeter and internal firewalls, intrusion detection systems and data encryption is extremely important.”

“Meanwhile, storing all this data off-site can increase the percent of square feet dedicated to patient care and increase revenue,” Broadway said. “Healthcare provider companies are looking at ways to increase revenue without adding space. Sometimes remodels work. Maybe they can add another patient per hour to a general practitioner’s schedule. Internal remodels that add rooms but not square footage can pay off. Turning space previously used for data storage into patient care areas increases the reimbursable space. It’s not just about how and where to store data. It’s also about collecting the information you have and analyzing it to determine if you are managing your human, resource and capital assets efficiently.”

When designing and selecting healthcare facility sites in Seattle, Broadway hears a lot of concern from clients about transportation to and from the facilities.

“All of our clients express concern about transportation,” Broadway said. “That includes the location of bus stops, access for staff and patients and even other forms of transportation such as shuttles, ride-share and valet.”

Broadway said her clients in Seattle, as well as in other suburban cities, are looking for more bicycle storage and electric charging station stalls.

 

Source: Bisnow

What’s Behind Medical Office Buildings’ Strong Trajectory

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One of the US’ fastest growing industries, healthcare spending reached almost $3.5 trillion annually in 2017.

The US Centers for Medicare & Medicaid Services anticipates national healthcare expenditures to grow to $5.7 trillion by 2026. With this growth, healthcare real estate, specifically medical office buildings, are poised for further success.

Medical Office Buildings

Medical office buildings comprise approximately 10% percent of the US office sector. These buildings are typically about 40,000 square feet and range from small physician offices to large healthcare systems. Investors are attracted to this asset class due to its stability and positive forecasts for a strong performance. On the rise for the last four years, medical office sales totaled $10.4 billion in 2018.

“Medical office buildings are so popular and are in demand as a renovation or as new construction,” says Jason Signor, CEO and partner of Caddis Healthcare Real Estate. “The market is phenomenal and occupancy levels and rental rates are healthy.”

It is well-known that the the aging US population is directly correlated with the rising demand for healthcare as doctor visits dramatically increase with age. Individuals 65 years and older spend five times more on healthcare than those who are younger. Yet, even with the favorable demographic and economic backdrop, new healthcare construction has not kept up with demand.

“With the continued shift from inpatient to outpatient care, new real estate strategies are being implemented which includes moving to urgent care centers, MOBs, micro-hospitals and health-system sponsored wellness centers,” says Signor. “ Outpatient care is booming and will continue to flourish in the future. The challenge, of course, is for our sector to keep up with the growing demand.”

Ambulatory Surgery Centers

Ambulatory surgery centers—healthcare facilities which offer patients the option of having procedures and surgeries performed outside of the hospital setting—have drastically reduced healthcare costs. According to the American Hospital Association, the number of ASCs and hospitals are almost equal with 5,534 hospitals and 5,532 surgery centers. While hospitals have declined by 5%, surgery centers have grown as much as 82% since 2000.

“ASCs will continue to dominate the healthcare real estate landscape,” says Signor. “We won’t see these large hospital campuses being built as much. As the campuses get older however, you will see more renovations as hospitals keep up with medical technological advances and stay abreast with ASCs.”

 

Source: GlobeSt.