Competition Is Keeping Healthcare Real Estate From Slowing Down

There are multiple factors surrounding the healthcare real estate market that might cause concern over a slowdown, but no such thing is occurring, thanks to the relentless competition in the Philadelphia area.

Repeated attempts by Congress to repeal and replace the Affordable Care Act leave the future of reimbursement programs, especially Medicaid, uncertain. Health systems are still consolidating and merging in the wake of the ACA’s passage years ago. In real estate, the office and multifamily development cycles are beginning to turn downward.

Despite all this, expansion in Philly moves ahead.

“In other markets, especially down South, you’ll see more of a gentleman’s agreement in terms of geographical markets,” Anchor Health Properties Senior Vice President of Development Katie Jacoby said. “People have their regions, but in Philadelphia, you see big bold moves into other providers’ backyards. And that speaks to the amount of quality healthcare in Philadelphia.”

For the past few years, urgent care centers have been the fastest-growing type of healthcare real estate, but many submarkets in the Philadelphia region may be filling up. Ambulatory care centers with a mixture of services and practices have been opening just as frequently.

“You still hear a lot of interest and buzz among health systems interested in urgent care, but I thought a year ago that we’d see a larger presence of health system involvement in urgent cares,” Jacoby said. “So much for-profit activity has been occurring and saturating the market with urgent care that hospital systems are wondering how they fit in the sandbox, what locations make sense, and how they can compete with the brand recognition of their system.

“Folks are still active, but urgent care hasn’t rolled out like I thought it would.”

New Jersey’s Virtua Health has been opening urgent care centers at a rapid pace, and while more are on the way in Delran and Hammonton, the company is focusing more on consolidating individual practices under one roof going forward.

“We have opened urgent care centers, and one can only open so many of those in a certain market,” Virtua Real Estate Director Julie Herb said. “We’re not going to continue to open those at the same rate, so our growth and our stability is based upon us making wise and methodical decisions.”

Virtua recently opened an ambulatory care center in Medford, and has an upcoming 30K SF center in Evesham Township that will bring together multiple Marlton-area practices.

“Clearly, we are looking at healthcare from the perspective of keeping folks out of hospitals, and the trend continues to the outpatient setting,” Herb said. “So we do consolidate services. We find it most convenient for our patients.”

Mixed-service medical buildings attempt to split the difference between the under-one-roof capabilities of hospitals and the more relaxed and less expensive primary care or urgent care experience, and doing that requires a specific sort of location and build-out.

“Our typical outpatient project is still in the 50K-75K SF range, maybe up to 100K SF,” Jacoby said. “But they’re ambulatory care centers with specialty care and diagnostics. Probably 50/50 [space sharing] with ambulatory surgery components, from what we’ve seen.”

With territory among the most prized assets for a medical building in the Philadelphia region, many developers and providers are looking to closed retail centers for conversions, rather than finding a new spot to draw customers to for the first time.

“More retail locations have become available, so as we look for sites, a former grocery store or Barnes & Noble sits within where consumers are moving about, getting things done for their family,” Jacoby said.

While not much cheaper than new construction — retrofitting a grocery store with HVAC, plumbing and electronics at medical standards gets pricey quickly — repurposing retail spaces still has proven more valuable than new construction both for the location benefits and for its increased speed to market.

Construction is indeed quicker for a redevelopment than a new building, but it is possibly more significant that conversions are quicker to pass through permitting and approval processes. In such a competitive market, those sorts of advantages count. Innovation has always defined healthcare, and efficiency is always a primary goal of innovation.

“We’re taking a hard look at the speed-to-market component,” Jacoby said. “We’ve spent a number of years looking at pieces of modular construction, and we’re seeing a blurring of the lines between that and traditional architecture and construction.”

If the federal government slashes the budget for healthcare programs, a slowdown is likely. But unlike before the ACA, providers are already trying to become leaner and more efficient in order to be prepared for further changes. All the while, they continue to have real estate needs.

“If you’re not doing something, then it’s more difficult to be successful long term,” Jacoby said. “You’re seeing difficulty across the map for healthcare, with consolidations and partnerships occurring. [Merger activity] is creating an abundance of strategic real estate work.”