Most everyone is aware of the seismic changes occurring in the health care industry. While the implementation of the Affordable Care Act is garnering most of the attention, a fundamental shift is occurring in the health care real estate business.
Buoyed by a perfect storm — providers are receiving lower reimbursements, construction costs are rising, interest rates are slowly nudging up — hospitals and doctors are searching for ways to most effectively and efficiently treat patients as trends suggest there will be more health care services needed, but patients will make fewer facility visits. This requires a sea change in how health care real estate is realized.
Smart Business spoke with Beth Young, senior vice president of Colliers International, to learn more about where health care real estate is headed.
New Campus Structure
A growing trend is the popularity of off-campus medical office buildings (MOBs). More and more physician practices are moving from central hospitals to retail options in the suburbs. Freestanding emergency and urgent care centers are sprouting up. The competition is fierce. Some hospital systems are erecting emergency centers directly across from competing hospitals. Others are master leasing excess space in MOBs in order to establish a competitive recruiting advantage under the assumption that the best and brightest physicians will be drawn to systems with roomy, plush office space.
Physicians tend to be attracted to green buildings. A somewhat surprising trend, because of the high upfront costs, is the construction of 40,000-50,000 square foot Leadership in Energy & Environmental Design-certified MOBs. However, because of lower operating costs, green buildings are a smart long-term investment. Developers are quoting operating expenses for LEED-certified MOBs at $4-$5 per square foot per year, compared to $10-$14 in older, non-green buildings.
Repurposing Real Estate
In an industry driven by mergers and acquisitions, it is inevitable that there will soon be fewer, but larger hospitals. Systems with real estate leases spread across large cities are struggling to determine what to do with their properties. Obsolete or underperforming buildings may be sold or redeveloped. Options for repurposing include skilled nursing, hospice, post-acute and long-term care.
Multiple properties may be consolidated into a single building. A significant single-tenant trend is developing a large “destination” that will provide multiple specialties including emergency departments, ambulatory surgery centers, radiology, pediatrics, orthopedics, common waiting areas, snack areas or restaurants, and in some cases even workout facilities.
New construction opportunities will be limited, as fewer large hospitals will be built. Most new buildings will be small facilities situated near residential communities. In an effort to shield themselves from risk, many hospitals moving forward with off-campus projects are opting to partner with outside firms that bring clinical or other expertise to the table. Some systems face obstacles when erecting off-campus buildings. They want to be in residential areas, but find that land is expensive because of zoning issues. Further, they are concerned about the future use of a potentially obsolete property at the end of 10-15 year leases.
More for Less
Non-traded Real Estate Investment Trusts are raising $1 million dollars per day to invest in medical properties. However, there is scarce supply compared to the amount of money available for investments. Cap rates are expected to stay flat because of the large sum of money being invested. In such a climate, preferred yield is difficult to achieve. Some people are concerned that such conditions will create overpricing of health care properties. However, underwriting appears sound compared to recent history — investors are not jumping at deals just to acquire a health care property.
It is expected there will be 50 to 100 basis points increases in the long term, but no changes short term. The markets are more competitive, so acquisitions are accelerated. A greater amount of debt is available and there is less structure. From the equity side, the further a project strays from basic MOBs the harder it is to obtain financing. Projects such as assisted living buildings present more challenges as such projects require more of a multi-family model. Lenders, for their part, say they generally prefer owner/operators to third-party developers.
Beth Young is senior vice president of Colliers International. Reach her at (713) 830-2166 or firstname.lastname@example.org.
Houston is known for many things: rockets, energy, the Astrodome and Beyoncé. It is also one of the top-performing U.S. metropolitan areas as measured by nearly any business or economic indicator, making it a cost-effective and internationally competitive business environment.
Houston is the fourth largest city and fifth largest Metropolitan Statistical Area (MSA) in the nation. Between 2000 and 2010, the Houston MSA increased its population by an impressive 26.1 percent, from 4.7 million residents to 5.9 million. Demographers agree that population growth will remain strong into the foreseeable future as domestic and international migration trends favor Houston’s geographical, cultural and economic strengths.
Smart Business spoke with Lisa R. Bridges, Director of Market Research at Colliers International, to learn more about the strengths of Houston’s business environment.
It’s not just quantity, but also quality of the workforce that attracts companies to Houston. Area residents are well-educated with the majority of the population over 25 years of age holding a high school diploma and residents with college/graduate educational studies outnumbering those with less than a high school education.
Educational prowess among Houston residents can be attributed to the area’s nationally recognized colleges and universities, as well as technical and trade schools, including Rice University, University of Houston, Texas Southern University, Houston Baptist University, Baylor College of Medicine, University of St. Thomas, San Jacinto College, and Houston Community College.
The high level of educational achievement translates to higher average income levels. The median household income in 2014 is projected to be $63,857 and the average household income level is pegged to be $85,409, both significantly over the national average.
Companies that do business in Houston not only have access to an educated workforce, but also a population able to spend money on their products and services. Houston’s employment sector has weathered the recession better than most major metro areas. The downturn was short-lived in the area and the Houston MSA began recovering jobs sooner than most.
Bolstered by above-average demographic trends and a strong base of diverse industries, Houston is well positioned to compete in today’s global markets. Long recognized as the energy capital of the world — with every major energy company represented locally — Houston now stands as a global example of economic diversity. The area is home to a thriving stable of industries including medical/biomedical technology, aeronautics, plastics manufacturing, electronics, software design, integrated power and global trade.
Houston’s strong economic base is a key factor in driving both domestic and international migration trends. In fact, Houston ranks third among U.S. cities with the most Fortune 500 companies with 23, trailing only New York and Chicago. Notably, Houston surpassed other major metros on the Fortune 500 list including Los Angeles, Dallas and Atlanta.
Houston has long been recognized as one of the most competitive U.S. cities for corporate relocation and expansion activity. Recently, Houston ranked No. 2 in the country for Site Selection Magazine’s Tier One New and Expanded Facilities for MSA’s with a population of more than 1 million. Chief Executive Magazine — for seven straight years — named Texas as the No. 1 state for Best Business, in which Houston’s energy industry played a huge role.
Favorable Business Climate
In addition to its diverse growth industries, and the skill and education of its workforce, a key factor underscoring Houston’s business appeal is that it is one of the least expensive major cities in which to conduct business. Significant benefits include the absence of state or city income taxes, no state property tax, as well as an exceptionally low cost of living index.
As a major transportation hub with two major airports, a world-renowned port, and superior rail and road infrastructure, Houston facilitates the interconnection of global business locations. Business alliances with major U.S. and international markets is further enhanced by the presence of 94 foreign consulate offices in Houston.
Houston’s ability to foster continued expansion in future-growth industries responsible for generating high quality, well-paid jobs across all business sectors has placed it in the top tier among U.S. cities. With its numerous business advantages, Houston is well positioned to successfully compete in today’s global marketplace.
I am bullish on Houston and proud to be part of a "can do" attitude in Texas. The bottom line is that our Houston economy continues to remain healthy, with overall leasing activity strong in the second quarter of 2012. The main driver in the Houston market is simple — strong job growth.
Our city added almost 90,000 jobs between May 2011 and May 2012 and our unemployment decreased to 6.9 percent, from 8.1 percent one year ago. Landlords continue to report strong velocity in leasing activity, resulting in over 1.4 million square feet of positive absorption in the second quarter, pushing the year to date total to 2.4 million square feet.
With all the positive news, the key is the energy sector. Some of the recent growth includes the expansion in North Houston and Woodlands, including Exxon Mobile's North Houston Campus, which is under construction, and Anadarko's second corporate tower in the Woodlands. Other submarkets are growing, including Phillips 66's recent announcement regarding plans to build a headquarters in West Houston, along with Apache's acquisition of the Galleria area land for a new headquarters building.
Although obviously one of the strongest office markets in the country, I believe the Houston market still will face some challenges due to mergers and company consolidations that will result in new sublease space hitting the market. At the end of the second quarter overall, we had almost 1.1 million square feet of sublease space available citywide, and in the CBD there is 360,500 square feet available, primarily in the Class A properties.
With the strength in our economy, our clients are now making longer term lease commitments (5-10 years) compared to a year ago. Landlords are now evaluating their tenant mix in their buildings, and if the tenant prospect has solid credit, they are offering aggressive tenant allowance packages to entice them to commit long term.
John S. Parsley, SIOR, is the principal and director of the Houston office of Colliers International. Reach him at (713) 830-2140 or email@example.com.
For over 50 years Colliers International has provided real estate solutions to many of Houston’s leading corporations, institutions, and small businesses.
Leading companies such as 3M, Crown Castle, Talisman, Christus Health, Fidelity and The Coca-Cola Company rely on them for strategic guidance and creative solutions. That’s why Colliers International is ranked the second most-recognized commercial real estate brand in the world by the Lipsey Company.
Smart Business spoke with J. Patrick Duffy, ICSC, MCR, the president of the Houston office of Colliers International and chairman of the Colliers retail services group, about how the company overcomes obstacles and employs innovation to be on the leading edge.
Give us an example of a business challenge your organization faced, as well as how you overcame it.
The commercial real estate market saw a significant drop in business after the capital market meltdown in 08. While A drop in volume was predictable, the length (time before recovery) and depth of the decline were very difficult to predict. We knew that we needed to tighten our belts and get ready for a few years of substantially decreased revenue. At the same time we saw the downturn as an opportunity to improve our efficiency and potentially grow our market share while our publicly traded competitors, who had more short term earnings pressure, were forced to make more drastic cuts. We made the decision to cut any luxuries from our operations but maintain the core support services that our clients and brokers required to achieve the best results possible despite the current market conditions. Our partners agreed that short term losses, while not preferred, were acceptable if required to maintain our services at a high level and to keep the skilled people with the organization.
We had cash reserves and no debt going into the downturn which made this decision possible and when we made the decision to acquire a friendly competitor and obtain a new office location in Sugar Land, our partners opted to add additional capital rather than use capital reserves for the expansion.
The result of this action was that we kept our brokers and clients happy, managed to break even while we grew the firm in a depressed market environment and grow our market share. We implemented weekly training and streamlined many of our processes during the downturn and are enjoying the fruits of those efforts now that the market has recovered.
In what ways are you an innovative leader, and how does your organization employ innovation to be on the leading edge?
Colliers has a robust international platform and is investing globally in training and information technology which gives us a real edge over most of our competitors. I was given the opportunity to be a trainer for Colliers University classes and have leveraged that additional training to bring the best practices of our global platform to Houston in weekly one hour training sessions. We are taking the best ideas from around the world and where appropriate, applying them here at home in Houston.
We have embraced social media and technology but a great deal of our “innovation” is just acknowledging that there is always a better way to do everything, looking for examples and embracing positive change.
What is the greatest lesson you’ve learned and how have you applied it?
Making sure that there is alignment within the organization as to who we are, where we are going and why is critical. We have a running two year plan that every person has a copy of and has had the opportunity to comment on. Having clear vision and a plan to make it happen energizes most people and makes work more fun. We try to keep it light but focused.
How does your organization make a significant impact on the community and regional economy?
We help companies acquire and dispose of the real estate that supports their business. That may be a single asset or a portfolio of properties. We assist existing companies expand or relocate to improve their profitability and prosper. We guide companies that are considering the Houston market understand the dynamics of this area and make good decisions about where to locate and how to control their occupancy costs for long term success.
We also take an active role in the community through work with charitable and community organizations. As an example, we hold a golf tournament every year to raise funds for a selected charity (new one each year). This year we are helping “Kids’ Meals” purchase and distribute over 20,000 meals to Houston pre-school aged children, living in poverty who are in need of food.
How have you added “value” to the products and services you provide to customers and clients?
Real estate is one of the largest expense (and asset) line items for any company after their payroll costs. By bringing our experience in locating the right real estate for their particular business and negotiating the best terms for the control of that real estate, lease or purchase, we can have a significant impact on the profitability and growth of a company.
In many cases we help our clients with creative solutions for disposing of assets that they no longer need or in the case of investment properties are ready for conversion to the next asset or cash. Our professionals average over 18 years of experience and work collaboratively to make sure that we bring the best ideas and implementation to whatever commercial real estate problem our clients may have.
What is your philosophy on going “above and beyond” for customer service?
There is nothing better than getting a “wow” out of a client. Put simply, that is our goal. Our mission statement is that we will “deliver a superior commercial real estate experience with an absolute dedication to exceeding our clients’ expectations.” That mission statement is framed and on everyone’s desk. We try to live it.
J. Patrick Duffy, ICSC, MCR, is the president of the Houston office of Colliers International and chairman of the Colliers retail services group. Reach him at (713) 830-2112 or Patrick.Duffy@colliers.com.