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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

Unprecedented Growth Projected In Outpatient Care In The Next 10 Years

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The U.S. population is projected to grow by 22.5 million people, or just shy of 7%, between 2020 and 2030.

Remarkably, three-quarters of the population growth, or 17 million people, is in the 65 years or older cohort. Nearly 4 of 5 healthcare expenditure dollars is spent by this older group. With the aging population increasing from 17% of the U.S. population in 2020 to 21% of the U.S. population in 2030, medical encounters will be on a rapid rise.

Forecasted growth in patient care volumes between 2020 and 2030, however, show divergent trends between inpatient and outpatient utilization. Inpatient admissions are expected to decline in absolute number from 34.9 million stays to 34.6 stays, or a drop of 0.9% in this 10-year period.

Outpatient care stands in sharp contrast with estimated growth of more than 20%, representing an added 540 million annual outpatient visits over the 10 year period. In 2030, outpatient encounters are expected to top more than 3.2 billion serving the expected U.S. population of 355 million individuals in 2030, or 9 visits per individual a year.

The trend towards outpatient care and away from hospital stays is a decades-long shift. Today, more than 50% of health system revenue comes from outpatient visits, a radical change from hospital-centric care to patient-centric care. In the past 20 years, inpatient admissions per 1,000 population dropped from 120 to 103, a reduction of 14%. During the same time, outpatient visits per capita grew 26%.

Advances in technology and medicine have enabled care to grow and thrive outside the acute care facility, a trend that has been accompanied by better healthcare outcomes, lower mortality and greater patient safety. Outpatient care has fueled the growth of medical office buildings, both on campus and in the community, supporting the shift to the “patient-centric” mode of healthcare delivery.

The pandemic in 2020 and 2021 put a spotlight on the jeopardy with delivery of U.S. outpatient care in an acute care setting. Thus, the healthcare crisis accelerated the trends in increased care in locations such as urgent care centers, ambulatory surgery centers and other outpatient medical buildings. At the same time, telehealth exploded in use during the pandemic given the obstacles to safe visits at the height of the crisis. Telehealth visits grew from 1% of outpatient encounters pre-pandemic to 12.5% at the peak in April 2020 to 6% today with widely varying utilization by medical specialties.

The aging and growing U.S. population and the overarching trend towards outpatient care is strongly supportive of increased demand for healthcare real estate and for the growing clinical intensity and value of medical office buildings of the future. Quality buildings occupied by major healthcare providers serving patients with greater and more acute services means durable, long-term occupancy with growth in revenue that can support the operating costs associated with occupancy. Medical real estate is expected to grow and perform in the same resilient manner in the future which will be positive for the owners of the properties.

Recent Activity – New Listing – Investment Sale

Central Illinois MOB Portfolio – 321,355 s.f. – Decatur and Peoria, IL
Closed – Debt Placement

Hoag Health Center – MOBs & Urgent Care – 159,235 s.f. – Irvine, CA
Closed – Debt Placement

114 Pacifica Court – 110,392 s.f. – Irvine, CA
Closed – Investment Sale

Brookfield Commons – 91,186 s.f. – Richmond, VA
Closed – Investment Sale

Omega Medical Center – 77,511 s.f. – Rockville, MD
Closed – Equity Placement

Thomas Park Investments – 55,608 s.f. – Haverhill, MA
Closed – Debt Placement

Oakwood Medical Park – 36,419 s.f. – Round Rock, TX
Closed – Investment Sale

Fertility Centers of Illinois – 30,264 s.f. – Glenview, IL

 

Source: HREI

Healthcare Real Estate Well-Positioned For Continued Growth In Post-COVID World

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The COVID-19 health crisis had a greater impact on demand for commercial real estate than the Great Recession, as mandatory quarantines, social distancing, shutdowns, supply chain disruptions, unemployment and an erosion of consumer confidence brought the industry to its knees in 2020 and through the first quarter 2021.

One bright spot in the troubled commercial real estate sector has been healthcare real estate.  While office visits for elective procedures plummeted, critical care, particularly off-campus, saw a surge as a result of the pandemic, balancing any weaknesses in the sector.

The U.S. Medical Office (MOB) vacancy rate was 8.6% as of Q4 2020, up from 7.8% at the end of 2019. In comparison, the overall office sector vacancy rate was 13.2% as of Q4 2020, sales volumes have held up extremely well, and real estate investors remain very bullish on the sector.

“The healthcare sector continues to play a dominant role in the US economy and has displayed year-on-year growth for many decades,” notes Martin Freeman, CEO of OrbVest, a global real estate company that invests in US income producing medical commercial real estate.  “From an economic and political perspective, the new Biden administration is strongly in favor of expanding healthcare services and benefits and we remain bullish on the sector going forward.”

Expectations for continued outperformance in the healthcare real estate sector is buoyed by some of the following fundamentals.

1. Structural Growth In Medical Office Demand Will Include, But Not Be Limited To Telehealth

Investors in healthcare real estate have to consider the impact of health-driven changes, economic-driven changes, and strategic-driven changes. Telehealth will be a great driver of healthcare real estate growth and be complementary rather than competitive. Take telehealth giant Teladoc’s merger with chronic disease manager Livongo, for example.

Social distancing, whether popular or not, will be a growth driver for structural and spatial improvements in medical office buildings, as consumers and staff will require modifications to feel safe.  Economically, capital preservation will impact real estate, and strategically, workforce deployment could be impacted. There could be some short-term disruption as we figure out how to take what worked with the “old normal” and integrate with the “new normal.” We should not be surprised to see limited capacities, rent relief or deferment, headcount reductions based on deferred procedures, and more.

However, long-term, as the sector will inevitably adapt and adjust, and healthcare real estate should have solid long-term growth potential because of shifting consumer needs and evolving demographics.

Medical Office Demand(Source: JLL)

2. Increased Real Estate Demand From The Segmentation Of Wellness And Acute Care Locations

“We are seeing a measurable shift from the hospital as the center of American healthcare,” explains Freeman, “this trend is likely to continue and accelerate in future years.”

This is another tailwind for healthcare real estate partially driven by demographics. The need for preventive and personalized care among millennials and seniors was already reshaping healthcare real estate long before the pandemic. We already discussed how America’s aging demographics appear to directly correlate with increased real estate demand for health services. Providers also understand that both millennials and seniors value preventive and personalized care. They know that these cohorts want to focus on leading a long and healthy life for themselves and their families. Plus, seniors now have access to less expensive and convenient care, while young working millennial parents have access to quicker and specialized care for their children. This has been working too well for it not to increase.

However, this trend is not exclusive to demographic shifts. Many of these triggers are due to rising hospital volume and how complicated they can be to navigate. Convenient access coupled with lifestyle integration look like a key driver. Hospitals will likely focus on higher acuity in-patient care over the long-term, opening up a need for additional real estate dedicated to lower-acuity, lower-cost facilities in more convenient and easily accessible locations in population centers.

Plus, with a brighter spotlight being shone on preexisting conditions, wellness and preventive care needs have never been higher. From a real estate standpoint, future outperformance will likely involve a combination of the following.

• Increased efficiency of outpatient facilities.

This can be considered a “medical home” model. This can include grouping primary care and specialty care in consolidated locations accompanying services such as imaging, pharmacy, and laboratories. This would also potentially require larger buildings with more giant footprints. The most significant providers have increasingly adopted this model already.

• The rise of “MedTail”

Retail and health real estate both share many commonalities, such as the need for high traffic, visibility, neighborhood proximity, and parking access. Shopping center availability and affordability are on the rise, and healthcare tenants may jump at the opportunity to increasingly relocate within retail centers.

This has given rise to a new segment of commercial real estate- “MedTail.” Retail locations with integrated healthcare options, such as drugstores are becoming increasingly prevalent.

According to healthcare real estate firm HBRE, small towns and suburban areas that once had little access to local medical facilities are seeing more options such as the CVS minute clinic or Kroger’s Little Clinic. Plus, urgent care centers have been popping up in retail strip malls as another offering to suburban residents.

Tether Advisors also performed a study and found that “nearly 80 percent of private equity, commercial real estate and retail healthcare respondents believe medtail investment will increase in the coming year and that COVID-19 bolstered the sector’s outlook.”

• Maximize revenue opportunities on a single site

Operators can maximize multiple revenue streams, such as promoting flexibility for different care delivery types at other times. Providers are also more willing to outsource facilities and project management services in strategic partnerships to ensure that they obtain the highest possible value from their real estate.

This could also create a significant real estate opening due to adjustments hospitals will have to make. COVID-19 increased the need for higher-acuity space within hospitals and pushed lower-acuity and administrative uses into alternative locations. This altered the functional mix of hospitals and heightened a public perception that hospitals are for very sick people. Many short- and long-term approaches affecting medical real estate should be seen here.

Hospitals will inevitably have to optimize their existing real estate and reduce the potential for contamination by modifying existing spaces and consolidating. They will also have to embrace higher-acuity care while managing contagion risk- even once the pandemic becomes more manageable.  Future success for hospitals will also involve embracing the shift to higher-acuity care and easing safety concerns within hospital facilities.

3. Medical Office Investments Are A Source Of Stability Pre-Pandemic, Mid-Pandemic, And Post-Pandemic

The numbers don’t lie. Medical office buildings (MOBs) are loved by passive investors because of long-term leases, stable occupancy, consistent income streams, and tenant quality. This asset class has many tailwinds blowing in its favor for both the short-term and long-term.

First and foremost, these properties greatly benefited from all of the aid in the multiple stimulus packages and the trillions dedicated to helping small businesses. Think of all the independent physicians and small practices that have benefited from the PPP loans. While many tenants struggled to pay rent, most of these medical tenants were absolutely fine. Loans from the federal government required hospitals to maintain staffing levels and continue to pay rent on their buildings, and as a result relatively few organizations had trouble making rent. In fact, in the worst part of the pandemic, medical office space owners collected rent from tenants in the high 90 percent range. As a result of the relatively low amount of rent deferrals, there’s a strong long-term outlook for healthcare real estate.

Consider MOB fundamentals and occupancy rates too. Across approximately 1.5 billion square feet in the United States, MOB occupancy has been remarkably stable. Between the financial crisis and now, MOB occupancy has fluctuated between 91.4 percent and 92.6 percent. Compare that to the average occupancy rate for offices in the U.S. in that same period- roughly 82.1 percent to 85.8 percent.

Medical Office Building OccupancyOr maybe you want to consider tenant retention. Because of the high investment in infrastructure required by medical tenants and barriers to entry such as regulations needed for surgery centers and imaging, MOBs on average report an average retention rate in the high 80 percent range, significantly surpassing typical commercial office retention.

Plus, despite all of the economic headwinds and the downturn in commercial real estate, new outpatient medical space construction has remained consistently stable at around 17 to 20 million square feet a year, roughly 1.8 percent of inventory nationally, and well below the national average of 2.1 percent for commercial office.

There is also virtually no speculative medical office development either, with most developers and lenders alike demanding pre-leasing of 50 percent to launch new construction.

Look at how medical rent growths have grown too. Nationally, the average medical office net rents steadily rose from $18.28 per square foot in 2012 to $21.51 in early 2020. This is a stable 1.5 percent year-over-year gain and 31.8 percent peak-to-trough return from the low of $16.32 in the fourth quarter of 2008.

NNN Rents

Key Takeaway for Investors

Can healthcare real estate weather the commercial market’s downturn?  The answer is a resounding yes.

“The current challenges faced by the global economy, and the potentially aggressive rebound in business sentiment in the US, creates an ideal opportunity for companies like OrbVest to assist investors from around the world to invest directly into medical real estate in the US and grow their wealth consistently and sustainably,” says Freeman.

Healthcare is changing, our demographics are aging, and if this past year showed us anything, it’s that an adaptable and forward-thinking health system is vital to a functional society. We will see numerous shifts in healthcare real estate and MOBs in the short-term and long-term. But the bottom line is that if you look at the fundamentals, you really cannot find a better long-term investment than healthcare real estate for stable income streams, quality tenants, long-term leases, and high occupancy rates.

If you look at investor activity since the financial crisis, this supports the sector’s fundamentals. This is a durable asset class, changing with the times, and a property type that will experience growth far into the future. If you are looking for passive income in real estate, healthcare commercial real estate offers an extraordinary investment opportunity.

 

Source: NuWire Investors