Obamacare Impact Overhyped, But Healthcare Trends Arent
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SCOTTSDALE—As much controversy as it stirred up before the election, healthcare reform won’t have as much of an impact on the healthcare real estate industry as the hype made it seem. Rather, it’s the innate changes occurring in the medical industry itself that are driving the trends in space usage.
Simply put, said Gary McKitterick, a partner with Allen Matkins, “We have to change. We cannot sustain what’s going on in healthcare right now. Space is cost, cost must change. All costs must come down.”
McKitterick moderated a panel on what healthcare reform means for development, design and patient care during the fifth annual RealShare Medical Office Buildings conference, held yesterday at the Four Seasons Resort here.
The speakers on the panel included end users, investors, architects and consultants. Collectively, healthcare real estate tenants are looking mainly for flexibility, cost and branding in their space. Also of paramount importance is freeing up space—namely, removing non-essential functions from hospitals and putting them into outpatient facilities, they told an audience of over 350 attendees.
The driver behind almost every single space decision is cost. The question for healthcare providers, said Sanford Smith, is, “How do you survive in a different cost and reimbursement model? It’s all about capital allocation, strategic planning, thinking differently about who you are and what your mission is.
“The rest of the world is a very competitive marketplace and healthcare has been insulated from that for a long time,” added Smith, SVP of real estate and facilities for Hoag Memorial Hospital. “The notion of how to create value is new to healthcare.”
Healthcare provider tenants are going through a significant amount of change, and that’s impacting their space decisions, noted Will Roberson, VP of medical facilities for Health Care REIT. Architectural design has been affected as well. “We went from having to know how to design and help build buildings, to absolutely having to understand our clients’ business models and design something that could be built and maintained inexpensively,” said HOK’s vice president and regional leader for healthcare, Alicia Wachtel.
One critical aspect of that, she added, is technology. The healthcare industry is “so behind on technology,” stated Wachtel. “If we don’t get up to speed on the services and efficiencies that technology offers, like in banking and other industries, we’re failing our industry.”
It also ties into space usage. Electronic record keeping has negated the need for storage rooms, noted Tom Conroy, Snyder Langston’s VP of healthcare, which frees up space. There’s also more integration of different uses within the same space—such as medical office, research space, clinical practices, said Wachtel. She adds that her clients are also interested in how to configure their space so they can use it 24-7.
Older product, said Smith, could be a cause of concern. “In a lot of cases,” he said, “old medical office buildings are a liability and the deal structure in those is going to be difficult to overcome.”
There’s a tremendous opportunity, though, in converting non-healthcare space into medical use, Smith pointed out. The speakers concurred, pointing to retail space as one of the best candidates since it’s both low cost and conveniently located.
That is actually one of the few ways that healthcare reform will impact the real estate sector. As Conroy put it, “When you talk about adding 47 million people to the healthcare system, it makes sense to make it as convenient as possible for people to be able to get medical services they need, and not overburden ERs and urgent care centers.”
Later in the day, a collection of some of the most well-known figures in healthcare real estate gathered to discuss trends in transactions and development in a session moderated by Murray Wolf, publisher of Healthcare Real Estate Insights.
They pointed to a number of general factors that are having an impact on the industry, in various ways. The rise in physician employment—that is, doctors opting to work within health systems rather than their own practices—has affected the way negotiations are done.
Michael Noto, SVP of the management services group for Health Care REIT, shared that these days, doctors want to maximize the flexibility in their leases—shorter terms, early termination rights, etc. With physician ownership of space on the decrease, hospitals are the main party across many space owners’ tables. “In markets trending toward heavy physician employment, you’re having different conversations with your hospital clients,” added Peter Kloepfer, chief investment officer for the NexCore Group. “The way they use space varies.”
The buy-versus-own decision is changing as well. “Many hospitals that would have used third party capital have opted to just use their own,” he said. “And they want more flexible purchase options.”
With more hospital systems as primary tenants, there’s also the potential for medical real estate to become net-leased assets. American Healthcare Investors principal Danny Prosky noted that he’s seeing more master leases being done with hospitals. But, he pointed out, “even though the facility may be leased to a hospital, it’s still a multi-tenant business model” since they have several divisions with different uses.
The trend of medical office timeshares is on the rise, at least in certain markets. The rationale behind that, said Sharon Harper, president and CEO of the Plaza Cos., “is really about mitigating risk for physicians or groups that are interesting in moving to a new market to build up their practice.” Typically timeshares are about 1,500 square feet, completely outfitted, easy to manage and occupied in half-day segments. “We’ve had one success story after another with it.”
Archway Holdings’ president, Sean Moghavem, related that hospitals like the model. “They like us to actually have timeshare suites across the street from them because it helps them with the rotation and recruitment of doctors,” he explained. Surgery centers are also behaving like hospitals. “They’re using our timeshare suites to attract surgeons so they can use the surgery facility downstairs. We also like to do it in our own buildings because it helps to incubate tenants.”
Public-private partnerships are becoming a great new opportunity to own and operate healthcare real estate. So are M&As between hospitals and healthcare systems. Prosky, for one, said, “In our business, we love hospital M&As. Monetizing real estate has always been a terrific way for these systems to fund these transactions. We expect this trend to continue and will present a lot of opportunities for institutional ownership of real estate.”
Mark Engstrom, EVP of acquisitions for Healthcare Trust of America, sees more M&As in the future. As a result, hospital systems are “going to be they’re going to be more focused and disciplined in how they manage their real estate. And having your on-campus real estate in close proximity to decisionmakers is key to forming relationships.”
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