Now is the time to invest in health care properties, according to speakers at the Urban Land Institute’s 2011 Fall Meeting in Los Angeles late last month. Growing demand, coupled with regulatory and technological change, will not only dramatically increase the number of market users over the next 20 years, but also alter the way that health care facilities look and function in the future.
Session moderator Jonathan Winer of Seavest, Inc., outlined the “inarguable” reasons as to why the health care industry will expand going forward. By 2030, he said, Americans aged 65 and over will increase from 13 percent (2010 figure) of the population to 20 percent. The growth in the proportion of older Americans relative to the rest of the U.S. population will result in increased numbers of physician visits, and Medicare, Medicaid, and Social Security will also account for more of the U.S. gross domestic product. As the number of health care users continues to grow demographically, Winer explained, advances in health care technology will also allow more patients to experience shorter stays in and less frequent visits to hospitals. Due to health care reform, nearly 32 million additional people are expected to come into the insurance system between 2014 and 2019.
In light of increasing demand, the outlook for investment in the health care property industry looks promising compared with that for retail, industrial, and office properties, according to Jeffrey Cooper of Savills, who spoke on the topic of capital markets. Yet, Cooper warned investors to exercise some caution. Hospitals and investors, for example, often clash over the length of lease agreements, with hospitals wanting shorter terms while investors want long-term leases. Medical office buildings (MOBs) also are an in-demand asset class, but there is a lack of high-quality supply. Overall, though, Cooper said that he considered now a good time to approach the market: cap rates are at historic lows, there is an active network of well-capitalized buyers and limited supply, and lenders tend to like MOBs.
Providing the developer’s perspective, Eric Fischer of the Trammell Crow Company explained the risks inherent in working in a rapidly growing industry. He said, “This is not a sector that you can have a hobby in. Your buildings are complex, cost a great deal, and can very quickly become functionally obsolete.” Fischer described the defining trends in health care development, including campus decompression, or the downsizing of facilities to create an “outpatient-type” environment. The advantage of this shift, he said, is that it reduces costs and allows for a greater volume of patients—patients who are happier for having shorter stays in the hospital.
Kathryn West of Partners HealthCare System, Inc., concluded the session by listing the pressures on health care industry providers. Because of the highly competitive environment among hospitals for patients, consolidation of health care facilities will increase in the future. Also, more patients will not necessarily mean more space, as users will increasingly receive treatment from home or from other community facilities. The top six real estate opportunities in the health care industry in the future, she said, are in standardization, space utilization, construction cost control, investing in maintenance, organizational changes, and strategic real estate ownership.