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Trends And Challenges To Watch In Post-Pandemic Health-Care Construction

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A year ago, predictions indicated a spike in health-care construction planning and development across the country.

However, the post-COVID-19 shift is trending away from the traditional model to an emphasis on outpatient care to offload pressure from hospitals’ main campuses, according to Richard Simone, CEO & president of Central Consulting & Contracting, a construction management and general contracting company that specializes in health-care facilities.

In an interview with Commercial Property Executive, Simone explains why health-care construction is trending toward smaller outpatient care facilities and clinics and discusses challenges within the sector.

CPE: How has the initial health-care construction model changed since the onset of the pandemic? 

Richard Simone: The factors causing changes in health-care construction are largely due to labor shortages, limited or slow-to-get resources and new operational requirements. Since the start of the pandemic, we continue to do more tracking of workers and data logs on construction sites. For example, we’ve implemented contact tracing logs of when workers enter and exit work sites, temperature checks, cleaning logs, social distancing, no gathering for breaks etc., some of which affects the length of time now needed to complete certain projects.

Also, supply chain issues with closed factories due to COVID-19 have affected completion times and many of the issues persist as manufacturing struggles to keep up with demand, and attract and retain the workers required.

During the height of the pandemic, we saw the need for rapid deployment of resources to build emergency bed units on very short notice, which required a total integrated project delivery approach. Because of the speed in which it was done and the necessary collaboration, we are starting to see more property owners and project decision makers who want to explore this delivery method on their regular projects, not just emergency.

CPE: What is fueling change in health-care construction?

Richard Simone: Projects that were on hold during the pandemic now need to get online as quickly as possible. As such, clients are considering ways to speed up the process via design assist, design build and/or off-site manufacturing. While these options have been around for a fairly long time, adoption has accelerated due to their proven efficacy during the pandemic.

In terms of COVID-19-influenced design, where possible, hospitals are considering the creation of a mass casualty incident entrance at the emergency department. Basically, adding a third entrance to the ED, in addition to the regular walk-in and ambulance entrances, would allow patients to be quickly triaged and separated, moving infected patients into the MCI/COVID-19 unit.

Also, the redesign of waiting areas has increased to allow for social distancing, more room between chairs, low-height walls with glass separation panels, more compartmentalization and minimal wait times. There are also design changes happening in ways most lay people can’t see, such as catering to the need to add more ability or flexibility to change air flows to decrease the spread of future viruses. Many health-care systems now require larger, more robust, high-efficiency particulate air filtration systems, with MERV 16-level protection which captures more than 95 percent of particles within a specified range.

CPE: What types of health-care facilities are we starting to see more often and why? 

Richard Simone: We are starting to see much more activity for behavioral health facilities. Before the pandemic, there was a great need and after the pandemic there will be an even greater need. Substance abuse has been on the rise since the pandemic, as COVID-19 and post-COVID-19 anxieties are all real issues many people are dealing with. Treating patients with behavioral and mental health needs requires a long-term solution that incorporates brick-and-mortar and telehealth-equipped facilities.

Micro-hospitals—whereby health-care systems are bringing health care closer to its more remote patients in, for example, rural areas—is a rising trend as well.

CPE: Are these impacting main campus hospitals in any way? 

Richard Simone: The rise in micro-hospitals and specialty centers is not impacting main campuses negatively, but rather, they are filling a very important need by supplementing main campus care and reach by providing the support and specialty care that patients need.

CPE: What about telemedicine-influenced spaces? Will these be integrated into construction? 

Richard Simone: We are not seeing a significant increase in telehealth spaces yet, as many facilities are using existing spaces for this purpose. I think specific spaces will need to be designed and built in the future, especially given the fact the 2022 guidelines for design and construction will incorporate specific acoustical treatment requirements for noise reduction, interior noise and speech privacy for telehealth spaces. I believe future design will have to consider telehealth-specific spaces, disbursed throughout the facility, with easy access for doctors and staff.

CPE: What are the infrastructure and operational considerations developers should take into account when building health-care facilities in a post-COVID-19 world?

Richard Simone: Considerations should focus on flexibility, including the ability to quickly change HVAC systems from positive to negative and vice-versa. Developers should also efficiently design in possible surge capacities, which would require the ability to quickly change private patient rooms to semi-private and the option to add more patient beds in urgent cares, ICUs and ED settings.

CPE: What can you tell us about the challenges arising in health-care construction?

Richard Simone: Many health-care systems and facilities suffered a tremendous financial impact over the past 15 months, and as a result, several projects are still on hold. The challenge is getting the systems back to feeling financially stable to get back to planning and building.

CPE: How do you see the sector going forward? 

Richard Simone: We still believe the health-care sector is the strongest market, with the greatest short-term and long-term growth potential. It appears to be rebounding quicker than other sectors. Although not as quick as we hoped, it shows signs of coming back stronger than before.

I believe the government—federal and state—has realized how fragile and out-of-date some of our health-care infrastructures are, and they will make the dollars available for hospitals to expand, upgrade and, in some cases, build replacement hospitals.

CPE: Are there any other trends we should keep an eye on? 

Richard Simone: Not a positive trend, but certainly impactful, is the challenge regarding the shrinking availability of skilled labor, as a large bulk of the workforce is aging and there is a lack of a new generation interested in learning the trade.

 

Source: CPE

Medical Office Property Remains An Investor Darling, Post COVID-19

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Once again medical office assets have proven their resilience against recessions.

According to a new CBRE report on medical office trends, investment sales of medical office properties experienced a moderate drop compared to most major property types last year as the pandemic gripped the United States. What’s more, investor appetite for medical office product appears to be growing in spite of a dip in healthcare employment in 2020. With a 50 percent drop in patient visits to medical office clinics in 2020, healthcare employment declined by 6.4 percent, according to Oxford Economics data. That was still significantly below an 11.2 percent decline in employment for the broader economy.

“Demand for medical office space for clinical healthcare services experienced a brief decline in 2020, particularly in the early months of the pandemic, when non-emergent outpatient services were suspended,” says Lorie Damon, managing director, healthcare advisory practice at real estate services firm Cushman & Wakefield. “Nevertheless, occupancy remained strong. Since then, healthcare providers that had planned to add new sites, relocate existing sites or acquire additional entities, have continued to do so.”

In fact, demand for space has accelerated as vaccinations were rolled out and new growth opportunities in the medical office sector have emerged as patients who deferred care last year returned, Damon notes.

“Medical office has been the ‘steady Eddie’ through two recessions,” emphasizes Chris Bodnar, vice chairman and co-head of healthcare & life sciences capital markets at CBRE.

In CBRE’s 2021 survey of healthcare real estate’s most influential REITs, institutional investors, private capital investors and developers, 80 percent of respondents said the sector is recession-proof. Property fundamentals data supports this view. Last year, medical office landlords collected more than 95 percent of rent due, according to data firm Revista LLC.

Bodnar says that medical office isn’t prone to huge rent peaks or valleys and last year’s rents were mostly flat. But about half of CBRE’s survey respondents are expecting a 2 to 3 percent increase in rent growth this year. The expectation for rent growth is based on pent-up demand for new space by medical providers that had put expansion plans on hold during the pandemic. A bump in rents for new product is also anticipated—partially due to an increase in construction costs that will be passed through to tenants.

Healthy Outlook

With medical office occupancy remaining stable throughout the pandemic, Damon notes that rents are already rising in some markets that have limited supply and steady demand for quality space. According to Bodnar, with little new product developed in 2020, there is now a dire shortage of new medical office space, which should push up rents.

“Oversupply in this sector was rare even pre-COVID-19,” Bodnar says. “As medical office developers are very disciplined—they don’t build on spec. Rather, they like to create an ecosystem of healthcare tenants that work together—or compliment each other—and then build around that nucleus. With the trend toward consumer-directed healthcare growing, particularly among millennials, providers are seeking space in locations convenient to the populations they serve.”

He notes physician groups and other providers are using GIS (Geographic Information Systems) modeling to look at demographics, population and insurance coverage to help determine where they should expand and how many physicians should be located in a new market. For example, with many young families with small children migrating to the suburbs, pediatricians may find this an optimal location to grow market share.

“Retail centers are on the list of potential sites, as existing space offers greater speed to market than new development,” Bodnar says. “Retail centers also typically offer attractive rental rates.”

Physicians and other healthcare providers prefer open-air centers, as they provide good visibility and can place signage directly above the space so patients can easily find them, according to Bodnar. Other advantages include nearby amenities, convenient access and abundant parking.

Damon notes, however, that medical office tenants’ criteria for space vary depending on the type of practice, patient population served and strategic goals. So, while retail and mixed-use centers are preferred by some types of physicians, they are not suitable for every type of healthcare service.

Growing Demand

Last year, investment sales of medical office properties fell by 12.7 percent, according to CBRE—far below the more than 40 percent drop in volume for traditional office buildings.

According to Cushman & Wakefield’s healthcare capital markets team, which is led by Gino Lollio and Travis Ives, investors have a very positive view of medical office, and many investors new to the sector are aggressively seeking acquisitions. But overall, acquisition activity has been somewhat constrained, largely due to supply constraints rather than a lack of investor appetite.

New investment funds pursuing medical office acquisitions are generally seeking core or core plus assets, with strong tenant bases and significant weighted average lease terms remaining, according the Cushman & Wakefield’s markets experts. These funds are mostly geography-agnostic, though some prefer the Sunbelt states.

Most investors in medical office real estate prefer buildings of 25,000 sq. ft or larger, located on or in close proximity to a hospital campus and anchored by a health system or a leading physician practice, according to Cushman & Wakefield’s team. Buildings within 250 feet of a hospital tend to provide the greatest rent premiums, as reimbursement by the Centers for Medicare & Medicaid Services (CMS) is 40 percent greater than for those facilities vs. off-campus healthcare practices.

The Cushman & Wakefield’s team notes that with strong competition for available assets, cap rates have compressed over the last year as investor demand increased. Yields have compressed as well, though compared to other commercial asset types, medical office yields remain attractive to investors.

According to CBRE data, the average cap rate on sales of medical office assets compressed by about 20 basis points year-over-year in 2020, with the average cap for portfolio sales declining by 100 basis points to about 5.52 percent. The average cap for individual sales dropped to 6.61 percent. Over the same period, the average price per sq. ft. for medical office buildings increased by 5.5 percent.

According to Bodnar, because of strong property fundamentals and a positive outlook, an increasing number of investors are switching their real estate allocations from traditional office buildings to medical office. Those new to the sector are often partnering with experienced medical office developers and operators.

Among CBRE’s 64 survey respondents who answered the question, a total of $10.9 billion in equity has been allocated to healthcare real estate investment and development activity in 2021. That’s approximately 11 percent below the results of the 2020 survey, but 6 percent above the survey administered in 2019. And of the 64 firms respondents to this specific question, only 13 are a healthcare REIT or an institutional healthcare investor.

For example, in January, MedCraft Investment Partners announced it was launching a $500 million joint venture for medical office acquisitions, and, according to The Wall Street Journal, Kayne Anderson Real Estate is getting ready to close a $2.5 billion fund and expects to allocate about half of it to medical offices.

Among the biggest private equity players, Blackstone and KKR have already made significant investments in life sciences real estate and are now seeking additional allocations in the medical office sector. In addition, Nuveen Real Estate, a global real estate investment management firm, has partnered with Healthcare Realty Trust, a REIT focused on managing, acquiring and developing outpatient medical facilities, to enter the medical office sector.

However, Cushman & Wakefield’s team notes that many of the large institutional funds now entering the medical office space are looking for immediate scale, preferably via large portfolio transactions or platform acquisitions.

 

Source: Wealth Management

Healthpeak Properties Makes $371 Million, 14-MOB, 833,000 Square Foot Portfolio Acquisition

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Healthpeak has not revealed the specific properties that were part of its 14-MOB portfolio acquisition. But in its “Q1 Earnings Release and Supplemental Report,” the cover photo caption states that the property shown, which HREI has determined to be 601 Watkins Centre Parkway in Midlothian, Va., occupied by Bon Secours Mercy Health, was acquired in April. The timing and health system affiliation are consistent with what the REIT reported about the transaction. (PHOTO CREDIT: Healthpeak)

In a significant deal that took place in recent weeks, Denver-based Healthpeak Properties Inc. on April 30 acquired a 14-property, 833,000 square foot medical office building (MOB) portfolio for $371 million.

News of the purchase surfaced in the Q1 earnings report recently released by the publicly traded real estate investment trust (REIT) as well as during the REIT’s May 5 earnings call with securities analysts, during which officials discussed certain aspects of the acquisition.

In its Q1 earnings report, Healthpeak notes that the deal was an “off-market” one and that the facilities are all on hospital campuses or are in off-campus locations but affiliated with “investment grade health systems.”

The MOBs, according to Healthpeak’s Q1 report, are heavily concentrated in the markets of Minneapolis, Chicago, Philadelphia, Washington, D.C., Los Angeles and Dallas.

 

Source: HREI