State of the Healthcare Real Estate Industry

State of the Healthcare Real Estate Industry

Western Real Estate Business asked three experts, whose specialties include healthcare design, leasing, management and development, to weigh in on the medical office building and healthcare real estate industry as our population ages and healthcare reform becomes a hotter topic than ever.

How is the aging boomer population affecting the healthcare real estate industry?

By 2030, there will be about 78 million baby boomers — 60 percent of them are predicted to be monitoring one or more chronic conditions. It is estimated that 33 percent will be obese, 25 percent diabetic, 50 percent will have arthritis and the number of knee replacements will multiply by eight. According to the Centers for Disease Control, more than half of all doctor visits are members of this generation. This increase in demand will require more healthcare providers and more medical space to treat those patient visits.

— Trisha A. Talbot, senior vice president, Healthcare Investment Group at GPE Commercial Advisors

How are most healthcare projects getting funded nowadays? Is this process getting easier or harder?

Generally speaking, funding is not getting any easier, but is being accomplished in a variety of ways. (Nonprofit) Hospitals or systems with strong credit ratings may go to the bond market, when the conditions are attractive. But with a climate that doesn’t always favor this traditional type of funding, these same systems are also taking advantage of the increasing supply of investment capital pursuing healthcare transactions and are using third-party capital for new development projects.

Hospitals or systems with ratings that aren’t as strong increasingly are looking to third-party capital and ownership for new projects. Regardless of the credit rating, speed to market is imperative for new healthcare. Third-party development and financing can be more efficient than funding internally or through tax-exempt alternatives.

— Jason J. Clark, managing director, healthcare solutions, Jones Lang LaSalle Americas, Inc.

What are the biggest trends in healthcare construction and development that you see right now?

Lean strategies and processes are a significant part of the healthcare service industry that is transforming decisions and approaches related management and operations of services and facilities. This trend challenges the planning, design and construction industry to introduce lean thinking and process improvement approaches into facility planning and construction delivery. Owners are looking for collaborative implementation strategies that help them evaluate better solutions that increase efficiencies, improve client/patient experiences, assist in speed of delivery for services, achieve reasonable first-cost certainty and reductions in total life cycle cost of developments, maximizing their value and minimizing risk.

— Joey Kragelund, associate vice president and principal of healthcare design, HGA Architects and Engineers

What are the advantages of leasing over owning healthcare real estate in this economy?

Healthcare providers that purchased buildings or office condominiums in the boom are likely realizing some of the aspects of real estate ownership. These include the costs and management efforts associated with maintenance and a reduction in property value. If they’re dealing with tenants, they must also focus on lease negotiations, renewal negotiations, property management and/or rent reductions for existing or new tenants.

When leasing office space, healthcare providers can focus on their core competency of providing healthcare services. In this tenant market, tenants can take advantage of a variety of leasing incentives. Right now the cost of a mortgage and the cost of a monthly lease are most likely equal in many cases.

— Talbot

Are fully integrated IT infrastructures catching on at many new healthcare campuses/facilities?

We are seeing significant capital expenditures—cumulatively reaching billions of dollars–toward integrated IT infrastructures. The primary focus or mandate is to reduce errors, centralize data for storage and accessibility and produce continued efficiencies. It’s also an invaluable tool for doing research and improving care. With that being said, new federal legislation focused on Accountable Care Models (ACOs) will mandate this type of IT platform for accessing data and quantifying reimbursement payments.

Some healthcare systems started this process last decade, but only 25 percent of hospitals currently use electronic patient records. We will see this number grow exponentially due to the 2009 federal stimulus package incentives and federal mandates for ACO model payments. As of today, only $2.5 billion of the $27 billion stimulus funds has been used. Due to the large capital expenditure need for IT implementation, some hospitals are looking at various cost-saving strategies, including improving how they manage their healthcare real estate overall, as a means to help fund IT initiatives that otherwise may be difficult to fund.

— Clark

Do you think green-building/sustainability is or will become a mainstay in the healthcare RE industry?

Trends and innovation in green building/sustainability/energy efficiency services and technologies will continue to emerge and evolve, having an impact on the design and construction industry as a whole. There are energy efficiency and sustainability strategies that make good, strategic sense in healthcare and for healthcare developments. The first cost of capital projects and infrastructure improvements have a substantial influence in the initial development and decision-making process for healthcare projects. However, with the total life cycle cost of a building or development being many times that of the initial project costs, owners are looking for ways to achieve reductions in the total life cycle costs of management, operations and maintenance for the estimated or expected life of those improvements and investments.

— Kragelund

How is the political climate and upcoming election affecting the level of activity and decision-making powers of healthcare administrators and developers?

Healthcare providers are putting decisions in a holding pattern. While the healthcare reform bill will start being implemented this year, and 32 million additional insured individuals are anticipated by 2014, the upcoming Supreme Court case and decision is also being weighed. Many practices and physicians are looking to go underneath the hospital employment umbrella.

— Talbot

Outpatient centers seem to be the new trend (vs. hospitals). Do you agree? Why or why not?

Following the trend of reduced cost, enhanced delivery of care and speed to market, the delivery of outpatient centers is growing exponentially. We traditionally see a 70:30 ratio of acute to ambulatory/outpatient centers, but I think the inverse will be true in five to 10 years. Healthcare systems can quickly play offense and defense, grabbing market share and branding their names in new territories while giving those communities better access to care. In that quest for the best location and low-cost delivery, some healthcare systems are even looking at distressed commercial real estate buildings and retrofitting for medical use.

— Clark

What are the factors currently influencing a healthcare owner’s planning and development strategies?

Rapid developments in advanced technologies, healthcare service and insurance reforms substantially influence owners’ strategic planning and delivery strategies of their services. Owners are looking for flexible and innovative ways to better deliver service to their clients, patients and the communities they serve by placing services that are not best suited to be in an acute care/hospital environment into appropriate outpatient environments that are closer to the community and more consumer-oriented. They do this in the hopes of achieving better outcomes, maximizing satisfaction and increasing their competitiveness.

— Kragelund

Source: Western Real Estate Business, Nellie Day

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