Change In Healthcare Delivery Model Bodes Well For Healthcare Real Estate

With the Supreme Court decision in 2012 regarding the legality of the Affordable Care Act, and the re-election of President Obama, the uncertainty hanging over the full implementation of the Affordable Care Act in 2014 is gone.

Although hospitals and healthcare systems have long recognized the need to reduce cost and manage care more efficiently, the Affordable Care Act is in effect the wind at their back accelerating the process.  Existing incentives that reward hospitals and health systems for the volume of services delivered to patients rather than the quality of those services is a primary driver of increased health care costs.  The Affordable Care Act is designed to incent hospitals and health systems based on the quality of care.  Please read our June, 2012 article titled, The Impact of Accountable Care Organizations on Healthcare Real Estate (to access go to pranews.wordpress.com).

At the intersection of quality of care and the most efficient and effective way to deliver that care is the patient experience.  As such, to increase patient access hospitals and health systems continue to construct community based sites or have them included in their future plans.  According to the 2013 Hospital Construction Survey conducted by Health Care Facilities Management and the Society for Healthcare Engineers, 11% of the over 600 survey participants (which included vice presidents and directors of facilities for U.S. hospitals) responded favorably to the following as it relates to future projects.

• Ambulatory surgery centers (11%)
• Satellite offices catering to specialties (11%)
• Outpatient facilities in neighborhood settings (15%)
• Urgent care facilities in neighborhood settings ((12%)
• New medical office building construction (15%)

Case in point with respect to the latter, Montefore Medical Center in New York is an example of what is a growing trend, although perhaps not on the same scale. Montefore recently announced plans to lease a new 11 story, 280,000 square foot ambulatory care facility at the Hutchinson Metro Center in the Bronx. Scheduled for completion in the fourth quarter of 2014, its aim is to provide multidisciplinary care that allows it to treat patients without hospitalization, referred to in the medical profession as “a hospital without beds”.  In addition to building new facilities, the hope by commercial real estate healthcare professionals is that hospitals and other medical providers will start to absorb some of the empty buildings, vacant retail and office space caused by the Great Recession.

The good news for commercial real estate in general and healthcare real estate in particular is that with market fundamentals improving, pension funds (private & public) along with endowments looking for yield are aggressively seeking commercial real estate assets and increasing their portfolio allocations after being flat for the last few years.  In fact some endowments are allocating dollars for value-added and opportunistic funds.  I think that’s great news for healthcare real estate.  Given the space needs of some hospitals and health systems and other medical providers, one can easily envision a scenario where a fund can re-purpose an office building or retail center using a medical provider as the anchor tenant, creating a long term valued asset providing better than average returns.

In the fourth quarter of 2012, the vacancy rate for medical office properties nationwide averaged 11%, according the research by Newmark Grubb Knight Frank.  The national vacancy rate for traditional office properties was 15.7 %.  Of course part of the challenge for healthcare real estate is that the market is in its infancy stages of development.  With only approximately 10 percent of the medical office properties trading in any given year, it can be a challenge for an investor to get in because of limited access to deals, and obviously to get out because of the lack of liquidity.  But the market is maturing and the trend with respect to deal flow continues to be strong.

Lastly, during the month of April (2013), the healthcare industry continued to add jobs, gaining 19,000 new positions, according to the new employment data released by the Bureau of Labor Statistics.  The largest healthcare job gains were in ambulatory care services with 14,000 new jobs, followed by home healthcare services with 6,100 and physicians’ offices with 5,400.  Over the last 12 months, the healthcare industry has added an average of 24,000 new jobs per month.

So the fundamentals continue to show solid improvement and demand for healthcare space will only grow stronger.

“Experience, expertise and our commitment to excellence are what drive positive results for our clients.”

Mark H. Caulton is president and managing principal of Princeton Realty Advisors, LLC, a Charlotte, NC-based diversified commercial real estate company with an emphasis on healthcare real estate.

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About Princeton Realty Advisors, LLC

Princeton Realty Advisors, LLC (PRA) is a diversified commercial real estate company with an emphasis on healthcare real estate.  PRA was founded in 2006 by Mark H. Caulton, its president and managing principal.  It has three primary lines of business: Tenant Advisory Services, Finance & Development, and Investments.  The company is located in Charlotte, North Carolina and has client relationships in Virginia, the Carolinas, Georgia and Florida (www.princetonrealtyadvisors.com)

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