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2021 Health Care Real Estate Year In Review

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This was another dynamic year for the health care industry and for health care real estate, which is demonstrating remarkable resiliency and innovative success in the face of unprecedented challenges.

Below is a summary of a number of key 2021 takeaways and trends that were discussed during our 2021 Health Care Real Estate Year in Review webinar, now available on our podcast channel by clicking here.

Academic Medical Centers

Academic medical centers (“AMCs”) (or health systems affiliated with an AMC) continued to lead large-scale “destination” medical center development projects in 2021. Several multi-billion-dollar projects anchored by AMCs were either announced or broke ground this year in regions across the country. The projects include a range of uses, including new outpatient clinics, ambulatory surgery centers, inpatient hospital expansions and, in some cases, non-medical uses such as housing and fitness facilities. The health care campus of the future is here!

Ambulatory Surgery Centers

Ambulatory surgery centers (“ASCs”) have come into their own with many of the major health systems looking to acquire or form partnerships with ASC owners and operators. This is driven, in part, by payors and patients demanding that more surgical services be provided in lower acuity settings. In 2021, over 200 new ASCs were opened or announced according to Becker’s ASC Review. Florida, Arizona, New York, Texas, Pennsylvania and Michigan topped the list with the most new announcements. In other ASC news, the trend towards convergence of payor, provider and operator continues. A number of for-profit payors and providers have gone on ASC buying sprees this year.

Supply Chain And Labor Shortages

Supply chain disruptions and labor shortages are tempering the pace of health care construction. The staffing, supply and hospital-bed shortages that health care providers and real estate developers hoped were temporary now appear to be longer-term challenges that will reshape hospital real estate and development projects well into 2022. The construction industry is not immune to labor disruptions triggered by ongoing COVID-19 challenges, which is resulting in delays for new hospital and development projects as contractors work to find qualified workers. By one estimate, contractors will need to hire 430,000 more employees in 2022 and 1 million more in the next two years to keep up with the increased project demand. If contractors do not meet those metrics, health systems should expect and plan for delays to their upcoming projects.

Construction industry supply chain challenges, like labor shortages, will continue to impact hospital projects heading into next year. Although demand for new projects continues to be strong, supply chain issues are causing health systems and developers to approach delivery timelines and project cost estimates with an added level of caution. Some of the major general contractors are shifting the risk of delays and cost overruns for supply chain issues to owners and developers. In response to ongoing supply chain challenges, some health systems have begun evaluating the use of a centralized service model using a Consolidated Service Center (“CSC”) to manage certain supply chain needs. Although typically evaluated in the context of operational supply chain needs, the CSC model could be evaluated in the context of facilities planning, as well.

Certificate Of Need Programs

In the wake of the COVID-19 pandemic, with many hospitals at or nearing capacity, many states have either relaxed or suspended certificate of need (“CON”) requirements, triggering significant new facility announcements. In Florida, for example, over $1 billion of new facilities have been announced in the last quarter of this year.

Telehealth

At the height of the pandemic, some experts claimed the physician office visit would be a thing of the past. Now, over a year later, we see telehealth stabilized nearly four times higher than pre-COVID, but not replacing the office visit. Telehealth visits appear to have stabilized at a range of 13% to 17% of visits across all specialties. The specialties experiencing the highest growth in telehealth usage include psychiatry and substance-use treatment. Consumer demand for virtual care solutions, however, continues to be strong. According to an AHA report, between 40% and 60% of consumers want more virtual care solutions, such as a “digital front door” or lower-cost virtual health plans. That said, the regulatory and reimbursement environment for telehealth remains uncertain, giving reason to temper growth predictions for the immediate future.

Hospital-Based Property Tax Exemptions And Government Intervention

Local government is continuing to take aim at nonprofit hospitals and health systems with respect to property tax exemptions and other real estate-related issues. In a widely watched case, a trial court decision in Pennsylvania ruled that three nonprofit hospitals were not tax‑exempt charities entitled to property tax exemption. The ruling has triggered local governments and school districts around the state to reconsider health care- and hospital-based property tax exemptions. In another closely watched governmental action, the State of New Jersey has proposed legislation that would require state approval for the termination of a hospital lease. The legislation, although aimed at one particular hospital, raises interesting issues of governmental authority, and legislation of this type could have far-reaching impacts.

Regulatory Matters

Qui Tam Lawsuits – Litigation under the False Claims Act has been on an uptick under the Biden Administration. The year 2020 saw the largest number of new matters initiated in a single year; and, although year-end numbers have not been released yet for fiscal year 2021, we expect to see that trend continue upwards. OIG self-disclosure settlement data indicates that remuneration and fair market value, together, represent nearly 70% of all cases. Settlement figures continue to be significant, ranging in recent years from $4 million for office leases not complying with the Stark Law up to $93.5 million for a hospital offering free office space to a physician group.

CMS Vaccine Mandate – On November 4, 2021, CMS released its Interim Final Rule (“IFR”) requiring COVID-19 vaccinations for individuals working in Medicare and Medicaid participating facilities, as well as individuals working in certain other settings involving face-to-face interactions with patients. The IFR effective date was December 5, 2021; however, legal challenges have enjoined enforcement in many states. Most recently, in an unprecedented move, the U.S. Supreme Court announced it will hear oral argument on an emergency application on January 7, 2022. The court’s order to hear oral argument on the issue demonstrates the perceived legal and practical importance of the federal government’s IFR.

Health Care Real Estate – Capital Trends

Historically low interest rates for taxable and tax-exempt debt continue to give hospitals and health systems flexibility in financing capital projects. Hospitals are seeing historically low rent factors and, increasingly, are taking more direct financial control of their real estate assets through direct placements and non-traditional financing mechanisms. Capital competition for core, quality, hospital-sponsored medical office buildings continues to be strong in light of supply-side shortages. On the other hand, skilled nursing and senior housing projects are facing a different set of challenges in terms of sourcing equity and debt. In a recent survey from Hilltop Securities, investors expressed the most concern with senior housing and skilled nursing sectors when compared to other industry sectors. This means investors and lenders will continue to take a more conservative approach to underwriting senior housing and skilled nursing projects heading into 2022.

Medical Office Buildings

The Medical Office Building (“MOB”) continues to demonstrate resiliency relative to other asset classes. Based on trading earlier this year, we expect final 2021 figures to show MOB sales volume having bounced back to pre-pandemic or near pre-pandemic levels, especially in sunbelt markets. As health care continues its shift away from inpatient care models, and as the traditional (non-medical) commercial office market continues to experience uncertainty, demand for MOB investment is predicted to remain strong.

Life Sciences

Over the last 18 months, governmental entities and private investors have pumped billions of dollars into the life sciences industry. A CBRE report found investments from venture capital into the life sciences industry last year totaled a record-breaking $17.8 billion through the second quarter of 2020 and anticipated funding from the National Institutes of Health to grow 6% from the prior year ($42 billion total). As a result, the demand for real estate to support that uptick in life sciences work also increased. The amount of laboratory space grew by 12% in 2020, with 95 million square feet of laboratory space in the United States and another 11 million under construction. It makes sense, therefore, that one recent market survey ranked life sciences and biotech as the best risk-adjusted health care real estate opportunity, significantly outperforming medical office buildings and senior housing. Because COVID-19 testing is widely available and vaccine availability is increasing, capital investment for research and development related to COVID-19 and other infectious diseases is likely to continue. As a result, the demand for real estate to support that research and development should also continue.

Medtail

Medtail — a relatively new term referring to the combination of medical and retail — has continued to gain traction this year. As health care consumers continue to seek convenience care options, expect the medtail trend to continue. In 2021, discount retailer Dollar General joined other retail giants like Walgreens and CVS when it announced the hiring of its first chief medical officer who will be tasked with expanding affordable health care services through Dollar General stores, especially those in rural communities.

Senior Housing

After a difficult two years, experts are predicting increased investment activity in this sector in 2022, even with forecasted occupancy levels not reaching pre-pandemic levels until late 2022. Senior Housing News estimates by 2029, there will be 14.4 million middle-income seniors. Providing affordable senior housing will continue to be one of the biggest opportunities and challenges, as 54% of the middle-income seniors will lack resources to pay market senior housing rates according to the same Senior Housing News report. Expect the post-pandemic changes to the senior housing industry to include:

• Hiring new clinical staff and bolstering on-site clinical services offered at senior housing locations;

• Expanding telehealth options for residents to reduce travel to off-site inpatient and outpatient facilities;

• Permanently installing and implementing disease and infection prevention policies and procedures to control future outbreaks; and

• Focusing on active living communities to better balance socialization and privacy, thereby avoiding the isolation many residents experienced during the pandemic.

The COVID-19 pandemic will not only affect the construction and operation of senior housing, but also the location of these facilities. During the pandemic, millions of people moved from large urban areas to less populated locations in middle and smaller markets around the nation. Many of these markets offer a lower cost of living and a warmer climate that may attract aging populations as compared to more densely populated areas. As a result, expect more development in those markets to align with the aging population’s migration trends.

Finally, a number of senior housing developers have started to offer “ultra luxury” senior housing products in certain markets. These facilities often include private chefs, personal butlers and premium design features and are targeting elite members with monthly fees up to $20,000 on top of entrance fees of $200,000.

Skilled Nursing Facilities

Despite a difficult two years and ongoing operational challenges, Skilled Nursing Facilities (“SNFs”) could see some modest relief in 2022; although, it is likely to remain a challenging environment for the near term. Earlier this year, it was announced that nursing homes would receive a 1.2% net Medicare increase for fiscal year 2022 under a proposal announced by CMS, which would result in an estimated $410 million much‑needed financial boost to SNF operators. According to the final rule, due to the ongoing public health emergency, CMS will also suppress the SNF 30-day all cause readmission measure for the FY 2022 value-based purchasing program year.

Social Determinants Of Health; Housing Is Health Care

Social Determinants of Health (“SDOH”) continue to gain traction with hospitals and health care providers. Last year, we reported on focus areas addressing homelessness and affordable housing, with some providers emphasizing “housing is health care.” We saw that momentum continue this year, with a number of major health care-anchored housing investments around the country. At this year’s HLTH 2021 Conference, executives from several major health systems highlighted affordable housing as a key health care intervention strategy. As a relatively flexible and tangible community benefits investment strategy, affordable housing is increasingly popular with hospitals and health systems. The early data on these programs show promising results. A March 2021 analysis of one hospital system’s affordable housing program, which includes over 800 affordable housing units, found a social return between $1.30 and $1.92 for every dollar spent operating those units. There is still a dearth of research about the social and economic returns of affordable housing and other social determinants programs, but expect more providers to invest in these types of programs if future data supports results like the March 2021 study. At the federal level, the Aligning for Health Consortium was successful introducing the Social Determinants Accelerator Act of 2021, a bipartisan bill designed to help states and communities develop strategies to better address SDOH and improve health outcomes.

 

Source: Lexology

How Big Will The Health Care In Malls Concept Get?

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The way America shops has changed, but some experiences are still better in person. The same can be said of health care.

Not long ago, outpatient health care and megamalls would have seemed like an odd marriage. But today’s consumers understand this is a marriage of convenience — one that can offer great benefits.

“The demand for health services detached from a large hospital is growing rapidly,” said Patrick Christensen, president of Sturtevant-based Horizon Retail Construction. “People are seeking out more options and want health care that is closest to them.”

Why Malls?

As much of retail has moved online, malls have one key commodity: space. And that space is getting more plentiful. According to Moody’s Analytics’ commercial real estate division, the mall vacancy rate in the first quarter of this year was a record high 11.4%.

Outpatient health care organizations can fill those spaces. The footprint of health care facilities can vary greatly. An urgent care clinic might fit well in a former bookstore. Other health care providers might require more square footage.

One Hundred Oaks mall in Nashville offers a case study for the ways outpatient health care facilities can revive a struggling retail space. Before 2009, stores were leaving and the mall was emptying out fast. Then Vanderbilt University Medical Center’s Vanderbilt Health facility moved in, taking up nearly half of the mall’s space. The new health care facility brought in foot traffic, which in turn attracted traditional retailers and breathed new life into the once-troubled shopping mall.

More Medical Malls?

The number of Americans 65 and older is projected to nearly double from 52 million in 2018 to 95 million by 2060, according to data from the U.S. Census Bureau. Demand for health care services should grow as the population ages.

Considering the benefits that malls offer patients — accessibility, physical space and proximity to other retailers and activities — the potential for continued growth of outpatient health care facilities in malls is immense.

“We are seeing a demand for more outpatient facilities off the campuses of large hospitals,” Christensen said.

Expertise in building care facilities

Sturtevant-based Horizon Retail Construction is uniquely positioned to help shape the way vendors and buyers experience malls. The company has extensive experience transforming retail spaces to make them more conducive to the needs of both retailers and consumers. Horizon’s clients in the health care space include VillageMD and Walgreens, Oak Street Health, Benchmark Physical Therapy and Humana.

The project with Oak Street was particularly ambitious: Horizon was responsible for opening the Chicago-based outfit’s first two clinics in Memphis.

“We are proud to be involved in the Oak Street Health program,” Christensen said. “They provide a great service to the community.”

For a health care industry that is ever changing, Horizon’s ability to “mobilize rapidly,” as Christensen says, could be an asset. Horizon employs more than 150 superintendents — none of whom are subcontractors. That workforce creates a speedy response time to client needs.

“We have shown the ability to quickly adapt to tenant needs,” Christensen said. “Because of that we are valuable working for both small and large businesses.”

 

Source: Waco Tribune-Herald

Office, Retail Owners Look To Fill Vacancy With Healthcare: It Often Doesn’t Work

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Children’s National Hospital is one of several D.C.-area health systems looking to expand its footprint into more neighborhoods across the region, and it is taking advantage of record office vacancy to find new locations.

“Children’s National used this strategy to lease two floors at the Wonder Bread Factory office building, a Douglas Development-owned property in Shaw that became vacant after WeWork and other tenants moved out,” said Children’s Executive Vice President and Chief Strategy Officer Michelle McGuire at Bisnow’s Mid-Atlantic Healthcare Summit in D.C.

Douglas Development principal Norman Jemal confirmed to Bisnow that Children’s National leased the first two floors of the building, which total around 50K SF and were previously occupied by a nonprofit.

McGuire said the deal is part of Children’s National’s efforts to expand from its main D.C. campus into neighborhoods across the region to give more people convenient access to healthcare.

“The health system also leased 140K SF in the former Discovery Communications headquarters in Silver Spring, and it is opening facilities in Friendship Heights, Columbia Heights, Anacostia, Takoma Park and Prince George’s County,” McGuire said. “We’ve been thinking about needing to be in communities to address gaps in care and access to care and access to specialty care, so that drives the need to have a broader footprint.”

For some health systems, the coronavirus pandemic highlighted the importance of having locations in the community. Howard University College of Medicine Associate Dean for Strategy Outreach and Innovation Michael Crawford said he saw the most successful Covid testing and vaccination sites were ones within neighborhoods, rather than at large healthcare campuses.

“Folks are craving that intimacy between their providers and that’s helping inform how we look at an ambulatory strategy,” Crawford said. “Is that co-location? Yes, co-location is an attractive proposition when you think about how you can array services to meet the needs of the customer. Is that looking at commercial spaces? Yes, you have to take that into consideration.”

Johns Hopkins University & Health Systems Vice President of Economic Development Alicia Wilson said her organization is also looking at commercial spaces as a way to be closer to patients.

“We’re thinking about our growth and thinking about our utilization of leased spaces within commercial buildings, and how we have our patient care be closer to our patients and repurposing our facilities at traditional hospital centers for those things that must be done at the hospital site,” Wilson said.

The prospect of leasing to health systems is especially attractive to office and retail owners that experienced rising vacancy during the pandemic. Cushman & Wakefield Managing Director Matthew Sullivan said medical users have increasingly heard from these owners looking to lease space to them.

“A lot of asset classes, office and retail in particular, have had a tough go the last 18 months,” Sullivan said. “The ownership of those asset classes calls the healthcare crowd all the time and says, ‘Can we get medtail, put medical into retail?’ or, ‘Hey, I’ve a got commodity [Class-]B office, and 20% is a couple physicians, can we convert it?'”

While the landlords are expressing more interest, Sullivan said it is often difficult to convert office and retail space into medical use. He said the cost can be so high that the landlord would need to land a large user with a long-term commitment. He cited one example of this, MedStar Health’s 112K SF lease with Beacon Capital at D.C.’s Lafayette Centre in 2015, but he said those deals are few and far between.

“Overall, it’s unlikely those are successful without dramatic changes,” Sullivan said. “All the infrastructure things have to be created, and that becomes really expensive. On the surface it sounds easy: ‘Let’s get medical folks and stick them here, and there’s good parking in this shopping mall.’ But medical is not going to take down a 200K SF old Macy’s. There are a few cases across the country, but overall it’s more challenging.”

“Landlords that try to put medical users in the same building as traditional office tenants often find the two are difficult to mix,” Anchor Health Properties Vice President of Investments Elliott Sellers said. “We made the conversion bet selectively across the country, but you need to go into it assuming that your commercial tenants are likely going to leave,” Sellers said. “Those two uses don’t really coexist all that well when you have a law firm in one floor and you have sick patients sitting in the lobby. In all four of those cases, we’ve had almost all of our commercial tenants leave.”

Sellers said office landlords are better off bringing in medical real estate experts and trying to market the full building to healthcare users, but he said the conversion projects aren’t easy to execute.

“You layer in the complexities of design and mechanical systems and layout, and I think there’s probably more losers than winners when it comes to conversion, not just in D.C., but broadly,” Sellers said.

Douglas Development, which leased the first two floors of its Wonder Bread Factory building to Children’s National, is planning to fill the top two floors of the building with coworking office users.  The landlord is rolling out its new in-house coworking concept, The Mark, on the former WeWork floors of that building and two other D.C. buildings WeWork vacated in October, the Washington Business Journal reported. Jemal confirmed the plans to Bisnow and said he thinks Children’s National and the coworking space will fit well together in the building.

“We were able to secure Children’s Hospital, which is a great tenant, it fits in great for the neighborhood, and it serves the community,” Jemal said. “The days of everybody wearing a suit and tie in an office building are the days of yesteryear. Everybody needs to see a doctor at some point — that’s just the reality of life — and where better for it to be than in the community?”

Health systems are also looking to locate within mixed-use developments that have apartments, retail and other uses. Whitman-Walker just broke ground on its new healthcare facility on the St. Elizabeths East campus in Congress Heights. Whitman-Walker CEO Don Blanchon, speaking at the event, said his team has focused on how to integrate the facility with the rest of the development to make it a space that feels like part of the community.

“At St. Elizabeths, we’re going to do a bunch of workaround healthcare, there’s going to be a bunch of services there,” Blanchon said. “The real issue is: What’s going to bring the community in? How do we think about that space, what do we do for activation on the ground floor? What do we do for engagement? What do we do on the outside of the space? In dealing with our partner Redbrick, there’s been a lot more thought about this sense of community ownership and activation. Ten years ago, we just didn’t spend as much time on that.”

 

Source: Bisnow