This article was published in the December 2023 issue of Southeast Real Estate Business. By Joe Magliochetti, CIO, Remedy Medical Properties
Healthcare is one of the largest and fastest growing industries in the United States, with projections for it to expand for decades to come. The growth in healthcare spending is attributable to a number of factors, but most notably to:
1. Changing demographic trends, including a growing and aging population, and
2. Increased utilization of the healthcare system among an older patient base.
A “Silver Tsunami” is coming as Baby Boomers age into senior citizenship. Our population is steadily growing and aging, with over 10,000 people turning 65 every day. Utilization of healthcare services drastically increases over 65, and there is a shortage of modern medical office buildings with the space necessary to serve this growing population in the most efficient settings.
To keep pace with demand, healthcare providers must adapt and shift to accommodate the growing patient population and their preferences.
Patient Preferences are Changing
Many patients are turned off by traditional hospital facilities. Many hospitals are behemoth buildings that have grown over time. They are frequently in inconvenient, inaccessible, dense areas with limited parking. Once you’re there, it can often be difficult to find where you need to go. Patients risk appointments being bumped due to more acute issues, and, in general, patients often have worse outcomes and a higher risk of contracting a disease or infection during a hospital stay. The setting is more sterile by necessity, making the experience even less welcoming. And for those who actually have visibility into their healthcare costs, traditional hospitals are more expensive because they have so much infrastructure, making operations more expensive.
Healthcare providers and payors are responding to rising costs and patient demands by shifting their delivery model away from an inpatient, hospital-centric approach, and are increasingly turning to a more efficient, patient-friendly, adaptable outpatient network model.
Accelerating Outpatient Care
Many hospital systems now employ a hub and spoke model for their outpatient networks. A large hospital serves as a central hub, and several smaller, more efficient facilities will geographically surround it. While critical, acute healthcare occurs at the hospital, all other services can occur within the community on an outpatient basis.
Technological advances are allowing more care to be performed in free standing EDs, ambulatory surgery centers (ASCs) and even medical office buildings. These facilities are more cost-effective, patient-centered, conveniently located, and produce better outcomes. They’re a win-win for both healthcare providers and the populations they serve. The outpatient network model offers healthcare providers the ability to retain and grow market share and reduce real estate costs.
Converting Real Estate for Better Margins
There is significant opportunity for healthcare providers to convert their existing, illiquid real estate assets into capital for use in higher-return investments, such as ambulatory network development, new equipment and technology, service line expansion, physician group acquisition, and more. This can be achieved through sale-leaseback or recapitalization with professional real estate investors, who also can often offer the opportunity for continued co-investment and ownership by the providers that occupy the buildings.
Healthcare real estate is a niche asset class that continues to experience strong fundamentals, including high occupancy rates, high tenant retention rates, and a strong credit-worthy tenant base. While there is no guarantee that past performance is indicative of future returns, the asset class appears to be more recession resistant than many, as demonstrated by asset performance and rent stability during recent economic downturns, including the Covid-19 pandemic.
The changing healthcare delivery model has created opportunities for real estate investment and development across the country. In most markets, oversupply and vacancy/rent volatility is rare due to limited speculative development and new supply being dominated by owner-occupied or build-to-suit projects. While the ownership profile remains highly fragmented, the asset class is highly regarded among institutional investors who have been increasingly active in the sector over the last five years. Furthermore, and most importantly, we believe the investment outlook in this sector is viewed as very strong on account of shifting U.S. demographics.
At Remedy Medical Properties, we believe real estate is not ancillary to healthcare; it is a key component in the delivery of patient care. We are able to help health systems and physicians cut costs and avoid redundancy by offering a way to remove real estate and its associated debt from the balance sheet, freeing capital to build service lines and capture market share. We are also changing how we design and develop buildings to accommodate technological advances, from robotic operating rooms to support for telehealth services.
Using Real Estate to Increase Market Share
Market share increases in healthcare are driven by growth in outpatient services. Our strategy is to acquire and develop outpatient facilities for healthcare tenants, and we offer market research and analysis to help clients make the best-informed decisions about how and where to expand.
Our in-house strategy team, Percival Health Advisors, takes a very thoughtful, healthcare-centric look at markets to understand where the healthcare hot spots are. Percival considers questions like: how much are outpatient visits expected to grow over the next five years in this zip code? Do certain service lines present better opportunities than others? Is your market share in a strong, promotable position or will it just lead to cannibalization?
To determine optimal placement, Percival considers access, community size, competitive and physician dynamics, and growth potential for each facility through a market prioritization analysis. Percival also considers where consolidation will create better efficiencies, financial value, and critical mass to support referrals and ancillary services.
Reducing Real Estate Overhead
Healthcare systems are very good at providing healthcare, but they aren’t always great at operating real estate. They know how to heal people. Even though real estate is a big part of their balance sheet, it’s not their focus. It is our focus.
When we save money for health systems, we effectively save money for ourselves. There are a number of strategies we employ. The first is a customized approach. Our buildings vary in size and type of tenancy; a one-size-fits-all approach may be easy but it does a disservice to our partners. For instance, a large, multi-specialty building may need maintenance personnel and onsite management, but that would be too much staffing and expense for a smaller, single specialty building. Since we’re the largest private owner of healthcare real estate in the country, we can split resources to service these types of buildings properly.
Along these same lines, we endeavor to keep our structure as flat as possible to reduce general and administrative expenses on the buildings. We rebid contracts like cleaning and landscaping annually to ensure we’re getting the best prices for the best service. Wherever we can, we leverage national contracts to create economies of scale. We always appeal real estate taxes. And finally, we employ technology, ranging from internal tracking software to building automation systems, to achieve efficiencies in facility management.
Healthcare providers should consider their real estate footprint as a critical component of strategic planning, but in doing so they should seek out real estate investment partners who can help maximize returns on provider capital, and help position their practices for the future of ambulatory medicine.
Joe Magliochetti is the CIO of Remedy Medical Properties, who along with their longstanding partner Kayne Anderson, is the largest private owner and operator of clinical healthcare real estate in the country. Remedy builds partnerships with providers to ensure the best patient care is provided in convenient, dedicated, cost-efficient facilities.