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.