5 Healthcare Trends Impacting Medical Real Estate In The Bay Area

From Kaiser Permanente to Sutter Health and Stanford Medical, the Bay Area offers plenty of healthcare services for its growing population. The Bay Area’s baby boomers and its large millennial workforce have led to a greater demand for outpatient medical services through medical office buildings.

What makes the Bay Area particularly attractive to real estate investors are these strong demand drivers, a huge middle class and aging population and access to technology, according to Everest Medical Properties CEO David Lynn. His company is actively acquiring assets in the Bay Area.

These five trends will continue to shape the future of medical real estate in the Bay Area and beyond, according to the Centers for Disease Control and Prevention.

1. Americans Are Living Longer

Life expectancy in the U.S. is about 79 years, but nearly one-third of the adult population has obesity, according to the CDC. People are living longer, but with more chronic illnesses, which has increased demand for services, according to Lynn.

“We spend the most by every measure on medical care, but we’re No. 17 in terms of healthiness,” Lynn said.

America ranks No. 3 on the world obesity list, he said.

“Obesity and just being overweight drives a lot of health issues,” Lynn said.

Heart disease, stroke and Type 2 diabetes are among obesity-related conditions that are some of the leading causes of preventable death in the U.S.

2. Demand For Outpatient Services

Healthcare providers are capturing more market share and are moving lower-acuity cases out of the hospital setting into less expensive outpatient centers, which are more cost-effective and provide an extension into the community, according to Meridian CEO John Pollock. Demographic shifts have supported this movement toward outpatient care.

“Millennials expect and want healthcare services delivered in areas and at times convenient to them,” Pollock said.

Baby boomers also prefer outpatient clinics where they no longer have to navigate complicated hospital campuses. Dialysis facilities, which are typically about 10K SF, are popping up everywhere and multispecialty outpatient clinics are moving closer to the consumer.

Unlike other parts of the country, hospitals are not allowed to directly employ doctors in California. This has led to the creation of independent physician groups with loose affiliations with hospitals and opportunities to own their facilities. For example, Hill Physicians in the Bay Area is starting to open branded facilities, according to Pollock.

“Healthcare is definitely moving away from mom-and-pop to more consolidated healthcare brands with improved credit and increased capital flow as a result of increased consolidation,” Pollock said.

Compared to Southern California, Northern California has a lot less fragmentation and many systems are competing for patients. This competition also has driven the proliferation of outpatient clinics throughout the area, Pollock said.

3. Retail-Oriented Medical Care

Along with a greater demand for outpatient care, some services are now provided through retail-based clinics for even quicker care. Medical care cannot be completely provided online either. Where many retailers are going out of business and leaving empty storefronts, healthcare providers are coming in with small retail-like facilities for urgent care and diagnostic centers. Patients like going to these locations, which are sometimes in malls.

“Patients like easy parking and can do other things and combine shopping with their medical needs,” Lynn said.

These retail clinics often are off major highways and roads.

“Demand for medical care continues to expand, but flexibility allows medical care delivery in different formats,” Lynn said.

4. Increased Use of Medical Technology

A lot more investment dollars are flowing into medical technology, which is leading to more technology available in MOBs and outpatient facilities. This technology allows for more procedures to be done cheaply, more efficiently and more accurately and leads to less patient downtime, according to Lynn. Fewer people need to go to hospitals for procedures that were once considered inpatient-only.

“More and more people don’t have to go to a hospital for new technology. The technology is coming to them,” Lynn said.  

5. The Repeal/Replacement of the Affordable Care Act

Under the Affordable Care Act, services were expanded due to more patients receiving insurance, and providers needed more space to care for these patients, according to Pollock. The uncertainty around the future of healthcare with the repeal and replacement of the Affordable Care Act may have some providers taking a step back.

“A lot of doctors will wait to start a new development,” Lynn said.

Regardless of what healthcare will look like, one trend is having a significant impact on healthcare providers.

“Another macro thing we continue to see is the overall reimbursement rates for healthcare through Medicare or private payers certainly are not going up,” Pollock said.

Healthcare providers need to provide services in a more convenient setting to capture market share, but are receiving a flat line of revenue with the care of more patients. Developers like Meridian are finding ways to provide affordable real estate.

Meridian typically does ground-up development of facilities 20K SF or smaller and has projects in Castro Valley and Oakland under development. Meridian also will purchase and reposition buildings of 20K SF and larger. Recent acquisitions include buildings in downtown Oakland, Rohnert Park, Brisbane and Pleasanton. Meridian does not own these assets long term.

Medical real estate also will remain attractive among investors regardless of legislative changes, Lynn said. The medical sector is worth about $1 trillion and medical providers stick with renewals at a higher rate than other tenants. Because people will always need access to care, medical real estate provides investors with more certainty.

“It is important to have more real estate that is recession-proof and not discretionary, but necessity-driven,” Lynn said.

Find out more about the future of healthcare real estate from Lynn and Pollock at Bisnow’s San Francisco Healthcare & Life Sciences event Aug. 10.