The Healthcare Industry Needs Commercial Real Estate In The Wake Of ACA

The Affordable Care Act has been challenging to the healthcare community, but according to the speakers at Bisnow’s 2016 Healthcare Leadership Forum, those challenges represent opportunities for commercial real estate investors and developers.

The ACA is responsible for an influx of millions of newly insured individuals nationwide, but it has also changed the model for how healthcare providers charge consumers and are reimbursed by insurance companies. In short, providers can’t profit from patients’ medical costs at the rate they used to, and they’re incentivized to keep them healthy rather than to keep them coming back.

Those changes are great for consumers, even as they put a strain on healthcare’s bottom line. Hospitals and provider networks have choices in how to adapt, with the most common choice so far being consolidation.

It’s the word of the day in the healthcare community, but consolidation is taking many forms. The simplest is the merger or the takeover, a field in which Thomas Jefferson has been the leader in the Philadelphia area. By increasing the size of their network, providers are able to keep their margins viable.

Michael Goldenberg (left) of Health Realty Advisors believes that once a company reaches a certain size—about $2 to $3B in value—there are “unbelievable opportunities to take cost out of the system.”

That prospect for larger networks has attracted capital investors, who are increasingly viewing healthcare as a secure, mainstream asset class. According to Ben Appel (center) of HFF, the number of investors dealing in the healthcare space has increased from around 250 to over 3,000 in the past decade.

“New investors aren’t just jumping in—they’re jumping in to make a splash,” says Ben, and it’s the larger portfolios that are the splashiest.

Hospital systems are also consolidating on the business side, by creating their own insurance products. Cheri Clarke Doyle of Trammell Crow says, “[Providers are] taking over the payer side and they’re deciding where their patients are going to be served, and how much they’re spending on their patients.”

A business’ desire for increased control over its cash flow is exactly what drives the need for consolidation, but there are other ways to exert control. The previously mentioned geographic control is the most obvious way, and it’s why providers are still so eager to build, despite the sinking cost of healthcare.

“Even though there isn’t a lot of money to pay for healthcare in general, the competition is generating the need for new construction in different markets,” says Andrew Jarvis (right) of EwingCole.

It may seem to run counter to the idea of consolidation, but competition for geography forces providers to keep building. Urgent care facilities are going up as quickly as any kind of medical real estate, both as a measure to retain patients with geographical convenience, and to more efficiently care for those patients.

“In terms of cost to the system,” Michael says, “the difference between an emergency room and urgent care is $10k versus $100.”

But in other areas of medicine, outpatient sites are often consolidating as well. Mainline Health is building a 135k SF health, wellness and fitness facility in Broomall, for example—part of the emerging trend of multi-specialty facilities that allow consumers to, say, get a referral for physical therapy from an orthopedist and get PT right across the hall. These facilities are at the forefront of medical real estate, and they require creativity from developers.

“A building forces you to practice medicine in the way it’s laid out,” Andrew says. “A building built in 1956 forces you to practice the way it was done in 1956 unless you blow it up and start over.”

Considering how much the industry has changed even in the last two years, it’s easy to see why large, centralized hospitals are losing popularity. For new buildings, Andrew says, “We’re literally drawing maps of the patient experience, from their arrival to their treatment systems to when they’re discharged.”

More than any policy change, the reason medical practice is so different from the way it was 60 years ago is obvious: technology. It’s the reason why healthcare real estate is perhaps the most challenging type to develop, but it’s also why the demand for it will never go away. The proliferation of smaller, more diverse properties is not just to accommodate for the changing insurance model, but also to make properties more nimble.

“If providers could change the footprint that they have and leave a facility in 20 years, they’d be much happier,” says Cheri, who adds that IT costs frequently outpace real estate per square foot.

That sort of drain on a company’s assets means that to keep building, hospital networks need to find other avenues to capital, either by raising equity or simply leasing where they previously owned.

Ben suggests maintaining ownership of larger core facilities while leasing satellite properties. This way, he says, “You can maintain money tied up in the sticks and bricks of real estate that can then be unlocked towards providing healthcare.”

“It’s always better to own than to lease,” Michael says. “But sometimes, providers need to go to a geography where they can’t own, so they lease because that’s what they’re trying to accomplish strategically.”

While leasing is to some extent relinquishing control, healthcare providers can mitigate that loss—by owning the property on which a building stands or selling that building to a developer and then leasing it back.

It’s in finding those creative solutions where commercial real estate developers and investors have value to the healthcare industry. That’s why, despite all the challenges in today’s medical marketplace, every panelist said they are bullish on the healthcare real estate market.

In a more local sense, Michael gave the (metaphorical) last word: “Philadelphia is one of the healthcare capitals of the world.”