BY BETH YOUNG
Senior Vice President
Many 2016 healthcare trends will continue from 2015; but some trends will be more noticeable. Overall, medical providers want to be more accessible to patients, provide better care and lower expenses. For real estate investors who focus on healthcare properties, here’s a list of what you may expect:
The greatest demographic factor to affect healthcare: age! Everyone knows about the Baby Boomers and the effect they will have on healthcare; but did you know 35% of all men over age 25 are considered obese. The work/life balance is now more important than compensation. As people age, they move closer to their children. Family members are making choices for their parents. The demographics in the U.S. will continue to evolve, so developers and landlords will adjust and put more emphasis on flexibility for their clients.
The greatest amount of ambulatory care or outpatient care is occurring off-campus or away from the main hospital. Acute care (inpatient/in hospitals) is shrinking; ambulatory is growing. Urban locations are expensive – the cost is cheaper in the suburbs.
There has been a narrowing of the gap between cap rates for various healthcare property types. The world capital markets and the lack of available properties for sale are driving this change.
Institutional investors have moved toward real estate and view medical real estate as a stable alternative. Investors will underwrite the operator in addition to the real estate to make a good investment. They will seek to understand the operation of the tenants/health systems (hospital systems), their ebitda, whether they are in or out of network and their ability to be a good long-term risk.
Average national cap rates are still around7 % with plenty trading higher; but some investors are dealing with cap rates in the fives. Rising interest rates will affect cap rates; but there is so much demand for this sector that the market can probably absorb 50-100 basis points before cap rates increase. A strong health system’s hospital at a 6% cap rate for a 20-year hospital lease is priced at a cheaper value than, for instance, 4.5% cap rate for a trophy office building. The reasoning is a hospital would decline in value due to obsolescence more quickly than a high-quality office building.
We are facing total uncertainty and an unknown revenue stream in the healthcare industry. The government has become the majority payer in the industry, and it is expected that they don’t plan to take on more payments under the new Affordable Care Act.
Developers’ viewpoint: Hospital campus driven deals two to three years ago were in the eight caps. Now off-campus credit-tenant leases with a health system are in the sixes or lower. Developers’ IRR is now going into lower teens or single digits. Their debt cost is higher than yield in some cases. They underwrite based on the dividend yield if held ten years. Renewal probabilities are a big factor. Developers are finding that an 80% chance of renewal isn’t a good assumption any longer because doctors are moving more often to new buildings with newer systems.
Lease renewals are down due to functional obsolescence for medical tenants. The physician groups that were bought by hospital systems are in place now, but will be moved to higher quality functional MOBs in the future. Independent physicians are being stressed on renewals based on how much they can afford to pay. Not all doctors can handle rising lease rates. There will be more shared space for clinics or multiple doctors. Some will want timeshare, co-locating or merging of their businesses.
Developers will act as a “trusted advisor” to health systems more often. Otherwise, they will have to compete with health systems who can develop their own buildings and then monetize them once they’re occupied.
Changes with health systems: Hospitals compete for market share by following the dollars and following the people. By following people with great payer mix, it usually includes some high growth areas – good communities. They’ll acquire other hospitals and take insurance whether it’s private or government based. They are providing cancer care, imaging, and other specialized care in the suburbs, although the cost is high for the systems. One system executive said that in 2008-2009, there were twice as many patients in their hospitals compared to their hospice care locations. In 2015, there were more in the hospice care because systems can’t get reimbursed for services thru the hospitals as well as through hospice care
Financing – there will be more joint ventures between systems and providers.
Net-leased sales by physicians for surgery centers and other medical properties require the right buyer because the doctors want a good long-term relationship. Sophisticated buyers and sellers find it very interesting that there are so many buyers buying LTACHs (long-term acute care hospital), SNiFs (skilled nursing facilities), and post-acute care facilities without really knowing the operators, which is key to the long-term success of the facility.
Other hot property types: free-standing ED’s (emergency departments/centers). Texas and Colorado are expanding in this area quickly. The idea is to grab the patient, brand them as your client, and keep them in the health systems’ in circle. These properties are here to stay. They are like specialty hospitals were ten years ago – no one understood them. However, they must have good coverage ratio and a strong operator to last in the long run.
Freestanding EDs (FEDs) and urgent care centers seem fragmented and you could see some consolidation long term if they don’t have a health system backing. It’s the retailing of healthcare. They are in strip centers, in front of big box retail, and the care is getting closer to the patients’ homes. It’s a ten million dollar investment to open an ED and grab market share. ED rents need to be in a lease-rate range that could be backed up with a retailer if the ED or urgent care operator fails. Investors must check rent comps.
REITS are bigger now, so they need to buy bigger transactions. Some REITs say they’re carrying elephant guns – but there aren’t many elephants out there.
The triple aim: better access to higher quality healthcare at a lower cost.
Health systems have sophisticated real estate departments; however, they may require help dealing with the need for cash. There’s a real “speed to market” need to get on a good corner, because a competitive health system will be planning to be on the opposite corner.
Additional parking solutions: When beds increase, parking needs increase. Onsite is not going to be an option in many cases, so hospitals are getting leases or easements to increase parking.
The pure multi-tenant building is a dinosaur. It will be replaced with hybrid buildings: 50% system-employee space, 50% independent private doctors. It gives the independent doctors flexibility, and the ability to transition to hospital employment on a gradual basis so they can be comfortable with the change. The interior design is very different: one receptionist will escort patients to their appointments in the building for the day. Patients will be in a full continuum of care.
Many developers are doing large single-tenant projects.
The focus is shifting toward health and wellness from fees for services such as surgery and treatment of illnesses. Some healthcare companies are partnering with others that focus on wellness rather than making operational changes.
Biggest mistakes in Wellness – doing a lot of homework on the market and then not paying attention to it. Many operators take the surveys and study them, find out they may need a gym or basketball court, and then decide the cost is too high to ever pay off – which may not be the wisest decision for the long-term.
Indication of an uptick for development: Attorneys are seeing more rights of first refusal on land, options to buy, etc.
Overall, we’ll continue to see plenty of money for healthcare property investments, but not enough high-quality properties on the market for all of the investors. That will encourage some investors to take more chances, and perhaps try out some value-add opportunities. The challenge will be to educate the sellers of challenged investments to be realistic about their pricing.