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Outpatient Health Care Services Driving CRE Income

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Nationally it appears that there is insufficient square footage available to accommodate the significant growth seen in the healthcare real estate sector, with the rate of absorption outpacing new product deliveries, according to Northmarq.

“This has put national occupancy rates for medical office at a historic high,” Colin Cornell, Northmarq vice president, healthcare investment sales, tells GlobeSt.com. “We anticipate a steady stream of opportunities for investors in 2023, including newly developed facilities, new long-term leases on historically vacant MOBs, and retrofits of what were historically retail-oriented buildings.”

Cornell said that like most sectors, healthcare has been in the price discovery stage since interest rate increases began, but values seem to be settling somewhere between 2019 and 2021 levels.

“The investor demand is there, and the question is will owners be willing to meet that demand at the new return buyers requires,” Cornell said.

These investors are best to focus on outpatient services, according to JLL’s most recent Healthcare and Medical Office Perspective, which shows that outpatient sites dominate healthcare services delivery compared to hospital admissions.

Additionally, according to Kaufman Hall National Hospital Flash Report, outpatient revenue rose 8% in 2022, while inpatient revenue was flat when compared to 2021.

JLL’s report said that up to a third of hospital revenue is activity shifting to ambulatory surgery centers, office-based labs, and other ambulatory sites.

“More sophisticated procedures can be done in outpatient settings than possible a decade ago.” Amber Schiada, head of Americas work dynamics and industry research, JLL, said in prepared remarks. “Innovation in care combined with reimbursement pressures are driving a sustained shift to outpatient facilities, and consumer preferences for outpatient care have increased as well, as outpatient facilities are often more accessible or conveniently located. Furthermore, experience shows that outpatient locations are less expensive to build and operate, produce better-quality medical outcomes, and yield higher rates of patient satisfaction.”

Medical Office Space and Health Care Real Estate Producing Income

Allan Swaringen, President & CEO of JLL Income Property Trust, tells GlobeSt.com that medical office space, and healthcare-oriented real estate more generally, will continue to be a key piece of an income-producing, core fund such as JLL Income Property Trust.

“The extremely positive demographic trends driving tenant demand for this sector, combined with the often-long-term leases of tenants who look to serve their local population and often invest heavily in building improvements, create a scenario where owners can generate long-term, stable cashflow,” Swaringen said. “That’s why we have continued to construct a geographically diversified healthcare-oriented portfolio that today is valued at nearly $635 million and totals approximately 1.4 million square feet.”

The Continuum Of Care

Andrew Salmon, chief future officer at SALMON Health & Retirement, tells GlobeSt.com that given the aging demographics, it’s no surprise that we are seeing an explosion in need for outpatient facilities.

“What’s pivotal is the consideration for the continuum of care, as the 80+ population is forecasted to balloon nearly 50% in the next 10 years, and they will require both inpatient and outpatient opportunities as they age,” said Salmon. “Our goal is to establish the continuum of care across the aging population, to ensure that independent and assisted living opportunities exist with convenient, local access to major medical providers, allowing our residents to maximize the outpatient system while maintaining independence.”

Outpatient Services Leads To Higher Satisfaction

Doug King, national healthcare sector lead for Project Management Advisors, tells GlobeSt.com that healthcare providers have been actively positioning outpatient services closer to where their patients reside for at least a generation.

Outpatient facilities typically result in higher patient satisfaction, King said, and the challenges to outpatient facilities presented by telehealth and home healthcare are minimal as many clinical limitations and regulatory challenges exist for these two off-site methods.

“Decentralized ‘brick-and-mortar’ outpatient facilities will continue to grow,” according to King. “A vast majority of care will be occurring in outpatient settings, including urgent care centers, free-standing emergency departments, medical office/doctor offices, and ambulatory care facilities – outfitted to accommodate same-day surgical activities. In healthcare, we say, ‘follow the money’ and The Center for Medicare and Medicaid services are reviewing how reimbursement strategies can promote this model. An example is the growth of OBL (office-based labs) to house sophisticated surgical and imaging services performed on an outpatient basis.”

Developing, Rehabbing, Modernizing Facilities

Mitch Creem, principal of GreenRock Capital, tells GlobeSt.com that investors have always viewed medical office buildings as safe investments during uncertain financial times, primarily due to their historically proven resiliency during market downturns.

“But now, 75 years after the Boomer generation was born, we are expecting a ‘gray tsunami,’ fueling the need for additional healthcare services and many more sites of care,” Creem said. “Physicians, hospitals, real estate investment funds, and individual investors are all keen on developing new sites or rehabbing and modernizing existing buildings to provide state-of-the-art care and attract new patients.”

Deliver Care In Outpatient Settings More Economical

Brian Edgerton, senior vice president, healthcare services team – NAI Hiffman, tells GlobeSt.com that after historic growth in 2021-2022, the sector is not without headwinds.

“It saw rising cap rates and fewer starts and deliveries at the end of 2022,” Edgerton said. “In 2022, healthcare real estate developers kept busy delivering modern medical office buildings to accommodate health systems and large multi-specialty practices, including those seeking to consolidate multiple specialties under one roof in highly visible, patient-proximate locations. At the same time, developers are feeling the squeeze of construction cost increases, supply chain delays, and interest rate hikes, all of which are reflected in the higher rental rates that must be charged to make these deals pencil out. Yet, even if they’re paying more today than they would have a year ago, it is still more economical and efficient for providers to deliver care in outpatient settings, many of which are located in close proximity to where their patients live and work.”

Edgerton said that like retail, healthcare increasingly follows rooftops, so services are moving closer to the patient thanks to technological advancements that can more easily be implemented in newly developed and repurposed buildings, rather than the medical office building of 30 years ago.

When Choosing Project Sites, Demographics Matter

Craig Gambardella, vice president at TSCG MD, tells GlobeSt.com that clients understand that their property, and a potential fit for an outpatient healthcare facility within that particular property, is crucial in their decision-making.

“You must look at demographic, psychographic and prevalence of diseases in certain trade areas, and 5- to 10-year projected growth of not only disease prevalence, but how that translates to outpatient demands to help health systems forecast potential growth,” Gambardella said. “For example, the owner of a large mall that is looking to repurpose a portion of it into medical must accurately forecast the demand in that area for an outpatient facility, what types of clinical services may be needed, based on disease prevalence and 5- to 10-year projected growth.”

A Continued Extension Of Outpatient Services

Rich Steimel, senior vice president and principal in charge, healthcare, New York, at Lendlease said that throughout the industry, more procedures are taking place away from the main clinical facilities as there is a continued extension of outpatient services across metro areas and into the suburbs.

“This shift allows hospital campus operations a greater opportunity to expand and connect with a growing base of patients who require critical care but desire the convenience of off-campus facilities,” said Steimel.

 

Source: GlobeSt.

AEW JV Acquires Eight Medical Buildings In Seven States Across The Southern And Midwestern U.S.

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A joint venture between AEW Capital Management and Flagship Healthcare Trust have completed the acquisition of eight medical buildings totaling 145,561 square feet in seven states across the Southern and Midwestern U.S. in a series of compounding transactions.

The purchase was financed through a loan by Fifth Third Bank, who had secured a senior credit facility for the buyers. Following the acquisition, Flagship will provide property and asset management services for the portfolio.

The facilities, which consist entirely of ambulatory surgery centers, are located in Texas, Arizona, Michigan, Illinois, Missouri, Tennessee and Florida. Nearly all of the tenants leasing space within the portfolio specialize in health care, with three quarters of them in top five national surgery centers and health systems.

Two of the properties in the portfolio include the Kleimen Evangelista Eye Center, located at 350 E Interstate 20 in Arlington, Texas, and the Joliet Surgery Center, located at 998 129th Infantry Dr. in Joliet, Ill.

The Kleiman Evangelista Eye Center was built in 2015, and was previously owned by the Inland Real Estate Group, who had purchased it in 2017, according to CommercialEdge information. The property totals 27,500 square feet and is fully occupied by a leading Texas ophthalmology provider. Situated the Interstate 20 highway, the facility can be quickly accesses by patients throughout the suburbs of Arlington, as well as the larger Dallas-Fort Worth area.

Fifth Third Bank Executive Managing Director Michael Perillo oversaw the financing of the transaction.

The Medical Office Mires

Health-care and life science facilities remain a resilient commercial real estate investment, with investors eager to get their hands on these properties. The sector recorded more than $2.9 billion in transactions in the second quarter of 2022, according to data from a report from the Brown Gibbons Lang & Co. While that marks a slight decrease from the $3.3 billion in the same period of 2021, it significantly outranks activity in other office markets.

Market Street Health Properties and Sixth Street recently created a platform to invest $300 million in medical office buildings around the nation.

 

Source: Commercial Property Executive

Still ‘Recession-Resistant,’ But Health Real Estate Could See Some Bumps

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Since the Great Recession of 2007-09, healthcare real estate (HRE) professionals have touted the strengths of the sector and the product type, going so far as to refer to medical facilities as “recession resistant.”

Healthcare facilities performed comparatively well during that crisis, as well as during the more recent COVID-19 Recession of 2020, reaffirming their status as a reliable commercial real estate investment – one with tenants that are more likely to continue paying rent than tenants in other types of facilities.

As a result, more and more investors, including a wide range of institutions, have entered the HRE space in recent years, driving pricing up and capitalization (cap) rates down for a wide variety of facility types, including medical office buildings (MOBs), ambulatory surgery centers (ASCs) and others.

However, despite the proven resilience of the HRE sector, a group of industry executives who recently met via Zoom acknowledged that there could be some bumps in the road, at least in the short term.

The discussion brought together members of the HREI Editorial Advisory Board, which comprises about 30 professionals involved in HRE facility investments, brokerage sales, development, ownership, leasing and law. The discussion was hosted by Murray W. Wolf, HREI’s founder and publisher, and John B. Mugford, editor.

 

Source: HREI