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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

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.

Medical Office Buildings Still Rule The Outpatient Space In Healthcare Real Estate

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Of the five main outpatient facility types, medical office buildings (MOBs), urgent care centers and ambulatory surgery centers (ASCs) have the most positive outlooks and futures in the healthcare and healthcare real estate (HRE) sector.

On the other hand, the outlook is not quite as positive for micro-hospitals, which have a “moderate” outlook, and freestanding emergency departments (FEDs), which have a “negative” outlook. That’s according to a scorecard, if you will, compiled by well-known healthcare research and consulting firm The Advisory Board Co., which is based in Washington, D.C., and is part of Eden Prairie, Minn.-based Optum.

Providing insights into The Advisory Board’s rankings and outlooks for the various outpatient property types was the company’s Fred Bayon, managing director. He did so during a 100-minute presentation that covered a wide range of topics affecting the healthcare sector during The Colliers National Healthcare Conference, held Sept. 12-13 at the Hyatt Centric Chicago Magnificent Mile.

“My job with The Advisory Board is to travel around the country and meet with our members … hospitals and health systems, C-suite executives and the health system boards of directors and let them know what’s happening in the healthcare market place, what they need to be strategizing about and be aware of concerning healthcare policies and healthcare changes and issues,” Mr. Bayon told the audience.

Near the end of his presentation, which included plenty of insight into current healthcare policy and disruptors to the status quo, Mr. Bayon gave the firm’s outlook on the various property types.

As has been the case for several years, The Advisory Board is most optimistic about the short- and long-term prospects for MOBs. The rise of MOB development and investment has occurred in large part because they allow hospitals and health systems the best and most economical way to enter new markets, to protect market share, to provide convenient access to patients and to help facilitate the coordination of care.

“The MOB market continues to be a positive, intriguing play for hospitals, health systems and investors,” Mr. Bayon told the audience. “Those players are and will remain interested in MOBs for years to come because they “are conveniently located, essentially for Medicare patients and commercially insured patients. Health systems do not want their patients to have to come downtown, they don’t want you to come into the maze that is the big hospital campus. Instead, they want you to go somewhere where there is parking and where there is a pleasant atmosphere, because that’s where they think they can drive volumes.”

The Advisory Board gives its next highest ranking to ASCs — which, even though they carry some risk because of the lower-profit margins they deliver — will continue to experience increased volumes in years to come, he said.

Mr. Bayon noted that volumes in ASCs are expected to increase by nearly 28 percent by the year 2027, driven in large part by ongoing policy changes by the Centers for Medicare and Medicaid (CMS) that will “reimburse Medicare procedures done in ASCs. For example, total knee (replacement) and some cardiac procedures” have recently been added to the list of procedures that, when done in ASCs, will be reimbursed by Medicare.

Also receiving a positive score, or outlook, from The Advisory Board are urgent care centers, which the firm is “pretty bullish on,” Mr. Bayon said.

“More and more health systems are looking at urgent care centers and having some sort of investment in them, or some sort of partnership in sites across the United States,” Mr. Baynon said. “We still see these growing rather rapidly and for us, this is becoming a primary care alternative that can alleviate some of the capacity crunch for primary care in some markets.”

Even though The Advisory Board is not as bullish on FEDs and micro-hospitals, Mr. Bayon noted that the firm is “neutral” on the facility type, as those that are placed in the right locations can provide benefits for health systems, especially when they are expanding into new markets.

“Micro hospitals, the eight- to 12-bed hospitals can help a system bring together some inpatient and outpatient services, with core services being acute care, emergency care, pharmacy and additional services,” Mr. Bayon said. “(Micro-hospitals) continue to be a big, big play in the Texas marketplace, but we can see this growing in other markets as well. What’s interesting about micro-hospitals for developers and healthcare providers is that these facilities are not subject to site-neutral payments, meaning they can bill at inpatient rates and then they can generate their own on-campus or off-campus definition, meaning they can put outpatient services within 250 yards of those micro-hospitals and not be subject to a site neutral rate. For us, I would say that right now we are pretty neutral on micro-hospitals.”

The Advisory Board gives its lowest ranking, or outlook, to FEDs, which, in some instances,

“One of the things to keep in mind is that government payers do not reimburse freestanding emergency departments, but they are dotted across the United States and there are some hospital systems that believe such facilities are something around which they can build more services over the longer term,” Mr. Banyon said.

The Advisory Board, however, has a negative outlook on the facility type in large part because “they could drive unnecessary utilization if we see a preponderance of them.

“And I think that CMS could look at decreased reimbursement to FEDs moving forward,” Mr. Banyon continued, “and this is not to distinguish between an ED in a hospital setting and a freestanding setting. That’s a big risk for health systems.”

 

Source: HREI