 Real Estate is Healthcare's Perfect Storm
Michael Berne is Senior Managing Director, Grubb & Ellis, New York, NY Recession, competition and cash restraints. All three have combined to give the healthcare industry an intense headache at a time when it is more important than ever to focus on the medical and technology advances that are the critical drivers of the healthcare business. It is also more important now than ever for CFOs of healthcare systems to think strategically, make timely decisions and implement them ASAP, says Michael Berne, a leading healthcare business and real estate consultant and senior managing director of New York City-based Grubb & Ellis. Q: Why devote a practice to advising healthcare clients, and why is real estate such an important factor for corporations in the healthcare sector? A: The healthcare industry is the country's--indeed, world's-- largest service industry. Most economists peg this industry as consuming 21% of the US gross domestic product (GDP). All segments of this industry---hospitals, senior housing, drug manufacturers, freestanding clinics, etc.--face challenges unique to the particular specialty. However, all healthcare-industry segments face the challenges of increasing competition and the need to innovate and overcome severe cash constraints during a recessionary period. One major strategy to generate capital to help achieve healthcare goals is to maximize the role that real estate plays in an entity's portfolio. This is particularly crucial in most healthcare entities since real estate is usually the dominant part of the balance sheet. The basic thesis is to think of real estate as an illiquid form of money---and the necessity to monetize real estate wherever appropriate. In other words, the driving force should be the accomplishment of the medical goals, and real estate should be aligned to achieving those goals. Q: How should a company in the healthcare sector go about aligning its real estate to overall business goals? A: Aligning real estate to a healthcare's core goals can be accomplished in many ways. Initially, a well-constructed master plan should recognize the entity's current status: where does the entity want to be in three, five and 10 years and how does the leadership intend to achieve those goals. The master plan should delineate the role that real estate will play. As a threshold issue, surplus and/or underutilized space or facilities should be identified and aggressively addressed as opposed to allowing a lingering demise and drag on the balance sheet. This will probably require a more sophisticated real estate inventory system, allowing a detailed financial analysis of each piece of real estate. This financially grounded plan will facilitate and maximize re-use or new use strategies taking advantage of current market trends and demand. The integrated plan will permit an analysis of what each space or parcel financially contributes to the business or point toward a disposition strategy (e.g. sale, sale lease-back) or creative financing or re-financing program. The decision to expand must be accompanied by a financial analysis, which conservatively projects the monetary value the additional asset is expected to generate. In other words, will the benefits-medically and financially-justify the costs associated with the new development? Q: Do strategies differ for new projects vs existing facilities? A: New projects should be monitored by an effective oversight function that keeps the job within budget. Existing facilities should be subjected to cost-efficiency strategies that range from purchasing to maintenance and technology to reporting systems. Q: Should the company look beyond its real estate in analyzing its role in the business? A: It's absolutely critical to look beyond the bricks-and-mortar. Decisions regarding major assets such as real estate facilities can't be made in a vacuum. The methodology described above is just the beginning of creating a plan to align real estate strategies with the goals of healthcare entities. Among other areas, a complete analysis confronts demographic issues, the competitive environment and medical trends. It's important to remember always that real estate is much more to the corporation than merely bricks, mortar and space. In fact, real estate is a form of money. That's how corporations should really look at this asset.
To contact Michael Berne, email michael.berne@grubb-ellis.com |