Treatment Strategies for Healthcare’s Real Estate Ills

By Glen Perkins, Executive Vice President & Managing Director of Development, PM Realty Group

U.S. healthcare networks are in crisis, struggling to deal with debilitating space deficiencies brought on by sudden swelling in their enrollment and employment rosters. Fortunately, commercial real estate professionals can render aid with a proven regimen of development and leasing treatments.

But what brought on the recent issue at hospitals, doctors’ offices and treatment centers? And what can developers and landlords do to help their healthcare clients thrive?

Medical History

The passage of the Affordable Care Act in 2010 accelerated an ongoing shift among doctors to close or sell their private practices and become employees of hospitals and large service networks. Many older doctors have sold their practices out of frustration with mushrooming reporting requirements, legislative measures and reimbursement headaches.

Turning those concerns over to a hospital or larger system can free healthcare professionals to focus on patient care. Younger doctors in particular are embracing the shift as a lifestyle choice, rejecting the around-the-clock hours of their predecessors in favor of regular hours and a steady income.

Office and retail landlords have enjoyed this consolidation trend in the form of improving tenant credit, as their medical leases have rolled over from individual private practices to higher-credit regional or national healthcare systems leasing the same space. Lenders and investors value stable tenants with deep pockets, which can translate into more favorable financing or higher asset prices.

For developers, the greatest opportunities in healthcare come from the expansion of hospitals on campus and, more important, outpatient facilities off campus. Forbes reported in May 2015 that the ranks of U.S. residents with health insurance grew by nearly 17 million during the previous two years, and service providers are eager to capture business from the newly insured. For many of those large service providers, real estate is an essential element in their plans to increase patient market share.

Community Care

Healthcare systems grow by hiring more healthcare providers and serving more patients. Today the trend is to directly employ physicians, as well as non-physician service providers, in an array of diagnostic and treatment centers throughout a community, like spokes of a wheel emanating from the hospital at its hub. Some developers have found lucrative opportunities helping hospitals replace on-campus office space with an expansion of hospital services and treatment facilities.

Moving doctors’ offices and other clinical services off campus frees valuable space for patient care at the hospital, but there are myriad other reasons behind this trend. Like retailers, healthcare networks want to expand their brand. In addition to gaining market share, the first hospital system to build an urgent care center, freestanding emergency room or imaging center in a submarket may effectively block its competitors from entering that area.

Patients, like retail consumers, will seek out conveniently located healthcare. Physicians and other healthcare providers, too, prefer to work close to home and will gravitate to employers providing better lifestyles with nearby workplaces. And for the hospital system, it is far less expensive to build care facilities in the various communities rather than on the hospital campus.

Real Estate Remedies

The healthcare activities in non-hospital locations have expanded in recent years to include emergency care, urgent care, out-patient surgery, laboratory services and imaging, cancer and dialysis treatment, in addition to doctor consultations.

In many communities, developers are building freestanding emergency rooms, with the same staffing and capabilities of a hospital’s emergency room but typically with shorter wait times and the convenient access of a retail corner. Laboratories and imaging centers, too, are bringing services once relegated to hospital campuses to convenient storefront locations.

Proximity remains a critical consideration, but savvy developers let clients determine whether a new imaging center needs to be near the hospital or an existing medical office building, or perhaps on the edge of a dense residential neighborhood.

Speculative development for healthcare is rare. Successful developers in the subsector build space to serve specific providers with particular needs. Developers that are experienced with how hospitals work with doctors and off-campus service providers will be in a far better position to see their properties filled with the high-credit healthcare tenants in the market today.