Next-Generation Healthcare Brings Urgent Care And Hotel-Like Clinics

Healthcare is hot. According to NAIOP, healthcare construction in the U.S. totaled $41.4B, or 9% of nonresidential spending last year.

In 2015, Americans spent $3.2 trillion on healthcare, roughly one-sixth of the U.S. gross domestic product. This translates to per-capita expenditures of over $10K, which Colliers predicted would grow 5.8% until 2025. Colliers also found that 22M SF of new healthcare space came online last year, up 57% from the previous year’s 14M SF, as medical office building vacancy rates hit an all-time low, average rents rose and net absorption hit its post-recession peak.

Boston-based Steward Health Care, the largest for-profit healthcare company in the country, has been aggressively expanding its portfolio in Phoenix. It completed a merger with Iasis Healthcare in September, gaining four Arizona hospitals. It is projecting revenues of $8B in 2018, and the fundamentals and market trends support this bullish goal.

According to Pew Research Center, 10,000 baby boomers will turn 65 each day for the next 19 years. This generation, along with millennials, has two demands when it comes to healthcare: convenience and concierge treatment.

The former is driving the proliferation of retail-integrated and instant care clinics, in which major pharmacy stores CVS, Walgreens and Walmart are aggressively investing. The latter is prompting groups of physicians to open swanky, spa-like treatment centers that boast no wait times, expert staff and the support of large healthcare networks at premium prices.

Although this second trend is partially profit-driven, as high stress levels in hospitals have been demonstrated to reduce patient visits, it also manifests the idea that a relaxing, beautiful environment can facilitate healing.

Healthcare is filling the void left by retail, as Americans vote with their dollars for e-commerce over brick-and-mortar establishments.

Neighborhood Outreach Access to Health acquired the 16K SF Cave Creek Grandview Plaza strip shopping center in August with plans to reposition it as a medical facility tailored to the local community.

Phoenix is the No. 2 area in the country for senior population growth, and No. 3 for senior living construction. Woodside Health bought Shea Medical Plaza, a Scottsdale medical office building, for over $11.6M in August. That same month, Crescendo Development bought the 53K SF Foothills Health Center in Phoenix for $12.1M.

Medical offices and hospitals have recently become less space-conservative when they expand, allocating square footage to larger, well-appointed and private rooms that make patients, their families and visitors feel at home.

Investors and lenders can diversify their portfolios with healthcare assets. While reliably growing, healthcare has the added benefit of being noncyclical, and thus insulated from macroeconomic movements that can make other asset classes more volatile. Healthcare assets help with portfolio diversification and hedging.

These opportunities do have certain drawbacks. For landlords, leases to medical offices can present zoning, medical waste, biohazard and other regulatory challenges depending on type and location.

“They will have many of the same accreditation requirements as the parent hospital, and fall under the hospital’s license, so many of the specialized services we’re supplying for safety, as well as engineering, will apply,” EBI Consulting Business Development Manager Bob Foster said.

Physicians or companies planning to open a new medical office should engage a team of specialists with comprehensive services, including due diligence and engineering, before approaching banks or lending institutions for funding.

Uncertainty about the future of insurance and government healthcare programs, specifically the Affordable Care Act, introduces a degree of risk for investors. Some believe medical office buildings are overbuilt, or have saturated select markets to an extent that there are localized healthcare bubbles.

Still, on balance, many CRE pros, analysts and investors remain bullish on healthcare real estate.

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