Lee & Associates: Healthcare is a Slow but Steady Sector
Healthcare has very different drivers when it comes to growth and demand. While highs and lows in the economy influence healthcare in many of the same ways other industries experience, it’s also governed by trends that are unique to how people seek — and pay for — their medical treatments. Chris Jacobson and Susan Wilson, both vice presidents and healthcare advisors for Lee & Associates Commercial Real Estate Services, took some time recently to talk to REBusinessOnline about today’s healthcare real estate trends.
Taking a broad look across the sector, some healthcare systems have lost revenue due to suspending elective procedures during the early months of the COVID-19 pandemic. “It’s going to take them a while to recoup that revenue,” Wilson says. “Additionally, now that they have reopened, they are spacing people out in waiting rooms, so they’re seeing fewer patients. There are currently opportunities for subleases with some major health systems. This could be an opportunity for some of the larger, more successful health systems to take over some of that space.”
Jacobson has observed that there are three types of investments occurring right now. The first of those are large healthcare systems presently focused on COVID-19-related care. The second is a category of providers waiting to see what happens once the pandemic has subsided. The third group are more entrepreneurial practices that are trying to take advantage of a slowdown and use real estate to their advantage.
Those wishful buyers, however, may not get the prices they’re hoping for. The uncertainty of where the economy is headed has resulted in rising property costs. But that doesn’t necessarily mean that healthcare real estate instantly reflects economic trends.
“Healthcare tends to look at trends in decades, as opposed to retail or office, which tend to look in years,” says Jacobson. “So, it’s a much longer-term approach. Even in 2009, when the Affordable Care Act was being initiated, healthcare didn’t go through many bumps as providers waited to see how they were going to get paid. It really didn’t change that much.” Jacobson also explains that, unlike other sectors that look at location demographics, healthcare follows insurance trends, and is thus more related to where people work than where people live and shop.
As larger, well-capitalized healthcare organizations are likely to take the lead with future trends, mergers and acquisitions will be on the rise, Jacobson says. “M&A activity slowed down a little last year, but I think it is going to pick back up again. For a while, the main activity was healthcare systems absorbing the smaller independent practices. Now, I think the larger physician-led medical practices are starting to get in the game. We’re starting to see opposing groups joining together to better compete. We’ve been seeing quite a few of these types of mergers recently.”
Hospitals Prioritize Master Plans
While the hub-and-spoke model of hospitals acquiring sites around their campuses continues, free-standing buildings where patients can go are popular as well. An example of this is a freestanding eye surgery center, where patients can go for all of their vision-related needs.
Hospital systems are big on master planning and portfolio optimization. As Jacobson explains, they follow the idea that the patient sees the building before they see the doctor. “That’s very important,” he says. “The systems are constantly evaluating how their real estate can deliver care better. It’s also such an expensive component of what they do. They want to make sure that it’s as efficient as possible.” In some cases, staffing is more of a priority than patients where building design is concerned. “It’s easier to get patients than it is to get staff. That kind of consideration is often paired with real estate insofar as how to retain staff and keep staff happy and safe while they’re in that facility.”
Wilson adds that today, hospital systems are taking a hard look at their portfolios and deciding what to sell. “And they’re asking, do we want to acquire more assets? I think they’re taking a step back and deciding what’s next in their strategy.”
On the positive side, healthcare could begin absorbing more high-visibility retail space as consumers turn more heavily to e-commerce and away from traditional brick and mortar shopping. “During the last downturn, healthcare enjoyed the ability to get into easy access retail locations,” Jacobson says. “I think that could come around again. And office space can also be an option for healthcare. I’m feeling positive about the sector’s access to better, stronger locations that weren’t necessarily possible in the past couple of years.”
Change Comes Slowly
Jacobson says he compares the stability of the healthcare industry to that of a slow train. “It just never really speeds up or slows down,” he says. “It looks really, really good as an investment when everything else is in the tank. Then when everything else is doing great, and you’re getting $60 to $80 per square foot net rent for retail, investors stop looking at healthcare and look at other areas like industrial or whatever the hot thing of the day may be.”
While urban markets in the Midwest are active right now, rural communities continue to be the locations where critical-access healthcare is in short supply, especially for practices such as dialysis where patients can’t travel too far from home for their treatment.
Investors for healthcare real estate assets remain stable as well. Wilson explains that the buyer pool hasn’t changed much and largely consists of REITs, private investors and insurance companies. She also explains that changes in construction and development practices are important to note. “Contractors who do healthcare are more eager to get work, so their prices are lower and they’re able to attract quality workers, because there’s a lot of people out of work,” she says. “However, some of the materials manufacturing facilities have shut down, so getting raw construction goods can be competitive. And the likelihood of inflation in the future is going to have an impact on construction costs for sure.”
While the pandemic continues to cause ripple effects in all areas of the culture and economy of the country, one thing is certain: People will always need quality medical care. And that’s not always something you can get through a virtual appointment.
“Even though healthcare gets more attention when the economy is down and less attention when the economy is up, investor-wise, it is a long-term, safe, stable, solid investment that, overall, really doesn’t change much,” says Jacobson.
— By Lynn Peisner