Chris Barnet
During the last 45 years, there have been a number of regulations and laws that have dramatically affected the commercial real estate industry, and will continue to do so, both nationally and in Texas.
With the passage of the Medicare Act on July 1, 1966, which guaranteed government-sponsored healthcare coverage for all citizens age 65 and older, healthcare employment increased 331 percent more than the national employment with an estimated 19 million people becoming Medicare beneficiaries.
This significant increase in healthcare employment equated to more than 1 million healthcare jobs in clinics, hospitals, nursing facilities, etc., thereby increasing the demand for medical office space.
A game-changer
In 1989, as part of the Omnibus Budget Reconciliation Act, the Stark Law was passed. This law has forever altered the relationship between doctors and hospitals by, amongst other things, prohibiting doctors from making referrals to facilities in which the doctors have a financial interest.
The Stark Law had a profound impact on the commercial real estate industry since the act made it no longer possible for a doctor to receive a below-market lease rate when occupying hospital-owned space, in return for which the doctor would make service referrals to the hospital.
The effect of the legislation made hospital-owned office space comparatively priced to off-campus space, resulting in new construction of buildings not controlled by hospitals, to house doctors adding off-campus technical services and out-patient surgery centers.
More recent moves
On March 23, 2010, the Patient Protection and Affordable Care Act, known as Obama Care, was signed into law, which expanded health insurance coverage for an estimated 32 million uninsured persons. The expanded insurance covered for this additional segment of the U.S. population will result in a greater demand for healthcare services and a corresponding increased demand for more healthcare facilities.
Applying the commonly accepted industry formula of 1.9 square feet of medical space for each patient results in an additional 64 million square feet of new medical space required to accommodate the newly insured population.
Additionally, in the next 16 to 20 years, the baby boom generation will add as many as 4 million people a year to that population segment for which millions of square feet of new medical space will be needed.
Unfortunately, for healthcare developers and landlords, there are a number of limiting factors for new medical facilities, such as the number of doctors, nurses, and other healthcare professionals; the ramp-up time for medical schools to produce more healthcare professionals; lower reimbursements over time for doctors and hospitals for services; and a current supply of 580 million to 615 million square feet of vacant medical space. In sum, there are a handful of factors that will limit the demand for medical facilities in the short and mid-term.
Ahead of the curve
Currently, many commercial real estate firms are expanding their medical office teams to add expertise in a number of areas, such as preparing market feasibility studies for new healthcare facilities and assisting hospitals to monetize their existing facilities through sale- leasebacks.
Examples of new healthcare facilities recently built in Texas include Forest Park Medical Center, Methodist Spine Hospital, Parkland Hospital Expansion, Central Texas Rehabilitation Hospital and Kindred Rehabilitation Hospital.
Although the aging baby boom population, coupled with recent legislation expanding healthcare coverage, will increase the need for healthcare facilities, medical office space as well as other product types such as retail, industrial and office space for health related businesses, the question remains: How much demand will the new reform create?
While the answer to that question remains a big unknown , it seems apparent that healthcare will be a vibrant growth industry for commercial real estate for many years to come.
Chris Barnet is the managing director for the health care real estate advisory group at CASE Commercial Real Estate Partners/TCN Worldwide in Dallas.