By Alex Ciorogar
The health-care market is rapidly evolving. Outpatient migration, an aging population, the growing popularity of micro-hospitals and the impact of digital technologies are just some of the trends shaping the industry today. After several years of increasing sales volume, a record $13.3 billion worth of medical office buildings changed hands in 2017, according to a recent NKF report. Unsurprisingly, health-care assets should remain highly competitive throughout the year.
Garth Hogan, executive managing director at NKF’s Global Healthcare Services, spoke to Commercial Property Executive about the strategies for further improving the value of medical facilities. Hogan also talked about the role of monetization and the impact of consolidation on the business, among other emerging trends in health care in 2018.
What are the major health-care industry trends today?
Hogan: There are quite a few trends impacting the health-care industry today, including The Tax Cuts and Jobs Act, which was passed in December 2017, and the consolidation of hospitals, health systems and physician practices. As more information is available on costs, consumerism is becoming increasingly important, while the availability of success rates helps patients make more intelligent choices. Outpatient migration and community-based care—capital availability is a challenge—are also worth mentioning as well as technology and telemedicine.
How is the health-care industry responding to changing medical needs?
Hogan: Mergers and acquisitions as well as consolidation efforts were at an all-time high in 2017, which will reduce costs and redundancy with competition. Health system financial leaders have made capital availability and sourcing a priority which will aid in costs associated with building new facilities to accommodate outpatient migration.
What are the main challenges in the health-care sector?
Hogan: Availability of capital, financial viability and technological advancements are some of the main challenges today. Population health management provides a higher quality of care with measurable outcomes at a lower cost, while new Centers for Medicare and Medicaid Services regulations will put more financial burden on physicians.
What can the health-care industry learn from other real estate sectors?
Hogan: Many health systems own and lease large amounts of real estate and we’re seeing their financial leaders making changes to manage it more as an investment. We’re seeing more hospitals consider monetization of some of their non-core assets to create capital and focus on portfolio optimization and strategy.
NKF’s recent health-care industry overview report shows that the bifurcation between core and non-core assets is something investors should keep an eye out for in 2018. What are some of the best strategies for maintaining or raising medical facilities’ values in the face of rapid market change?
Hogan: Keen health-care investors are looking for several factors that drive value. For example, strong utilization of space or a good story of the building’s purpose and the ways in which it relates to the strategies of a health system or a physician group. Additional value-add moves would be lease terms of more than 10 years and specialty services that anchor the building, such as imaging, surgery and cancer treatment. Some of the negatives that hurt value would be above-market rents or excessive and unnecessary tenant improvements.
For medical office buildings, construction is up and profits hit record numbers in 2017, even though prices for this type of assets are still high. Is this among the health-care industry trends expected to continue going forward?
Hogan: We’ve already seen examples of construction slowing down due to material and labor cost increases. The slowdown doesn’t mean the project won’t be built, but there may be a rethinking of the business plan, a less costly redesign and a delay in groundbreaking.
Image courtesy of NKF