When President Barack Obama signed the Patient Protection and Affordable Care Act (ACA) into law nearly four years ago, he said it would revolutionize medical care and the medical industry itself. So-called Obamacare, which began delivering coverage in January, aims to provide government-subsidized insurance to about 32 million Americans who previously could not afford it, as well as improve overall patient care.
Yet, the president’s signature on the bill did not just reshape the future of health care in the United States; it also unleashed pent-up demand for construction of new hospital facilities and rehabilitation of older ones, as well as triggered a seismic shift in the way medical services will be provided in the decades ahead.
With legal and congressional efforts to overturn Obamacare virtually ended and computer glitches in the signup system diminishing, “the uncertainty that has dominated the health care industry and its real estate market over the past few years has largely gone away,” says Scot Latimer, managing director in the Healthcare Solutions group at Chicago-based brokerage Jones Lang LaSalle. “There has been more strategic planning going on over the past several months than there was in the previous three or four years.”
National growth projections are staggering. About 100,000 new hospital beds will be needed in coming years, Latimer forecasts, about 100 times the number currently found in Minnesota’s famed Mayo Clinic. The number of patients served by smaller community health centers is expected to rise to 33.8 million by 2015, nearly double those served in 2009, according to the Geiger Gibson Program in Community Health Policy at George Washington University in Washington, D.C.
The typical health care system requires about 1.9 square feet (0.2 sq m) of space for each patient, according to brokers in the New York City office of London-based realty services provider Savills. According to this formula, the 32 million Americans expected to become insured under Obamacare would translate into the need for an additional 64 million square feet (6 million sq m) of medical space.
“It’s clear that there will be greater demand for every type of medical space, whether it’s relatively small clinics to large hospitals or freestanding emergency rooms,” says Latimer. “Those [newly insured] people will finally be able to visit a doctor, and they’re going to do it.”
Demand for new space will be fueled by baby boomers reaching their 60s and 70s and seeing their medical needs increase. Each day, another 10,000 boomers turn 65, according to Washington, D.C.–based nonprofit Pew Research Center—a trend that will continue for the next 16 years.
While some medical service providers are dusting off previous development plans or drawing up new ones, many also are ramping up expensive modernization projects prompted by what one real estate expert calls “the most overlooked aspect of Obamacare”—dozens of new federal requirements that require both big hospitals and private practitioners to invest huge amounts of money in new systems and procedures to meet the law’s guidelines.
“The cost of meeting those new requirements is already encouraging a lot of private physicians groups and smaller hospitals to merge, seek a buyer, or partner with larger health care systems to help absorb those costs and make the transition easier,” says Stacey Hall in the Orange, California, office of Lee & Associates Commercial Real Estate Services, who specializes in the sale and leasing of medical facilities. “That trend is only going to strengthen over the next several years.”
All told, spending on new health care–related construction is expected to rise 6 percent in 2014 from 2013, according to an early forecast released last fall by FMI, a Raleigh, North Carolina–based real estate consulting and investment banking firm. The $44 billion in expenditures predicted by FMI for 2014 would be more than three times that spent on lodging construction.
“It’s conceivable that the $44 billion figure could go up,” adds FMI research consultant Philip Warner, because the 2014 forecast came as efforts to overturn Obamacare were reaching a crescendo and before last fall’s federal budget sequester was resolved. “There’s more certainty in the market now.”
Regardless of the amount, most experts say spending on medical-related facilities likely will be uneven.
In high-density urban areas, where buildable land is scarce, large physician-owned medical groups and managed-care giants such as Kaiser Permanente are increasingly looking for nonmedical buildings to repurpose in order to accommodate their expansion or merger plans if their existing campuses lack enough land to build on. Some providers are even buying or leasing space in modest strip malls, in part because it can make their services more accessible to their neighborhood patients and help lower costs.
It is a different story in the suburbs, where developable land is more plentiful. Several medium to large providers have already started building new facilities or expanding on existing campuses. Many are also looking at the construction, purchase, or lease of smaller suburban buildings that better serve local clients and work as a feeder for their main facilities nearer their larger urban hospitals.
“The common theme, whether [the service provider] is in a city or in the suburbs, is that the hub-and-spoke formula will continue to gain in popularity,” says Latimer. “The smaller facilities that are scattered about will feed patients with critical medical needs into the flagship hospital—the hub.”
The hub-and-spoke trend is being fueled by technological advances in the medical industry, as well as by the ACA’s emphasis on accountability, affordability, and patient access. Relatively major surgeries or treatments that once could be performed only in a formal hospital setting now can be done in smaller clinics, and the ACA provides financial incentives for providers who make it easier for their clients to visit a medical professional.
Many of those clinics, as well as larger medical office buildings (MOBs), are located in former retail outlets or traditional office structures. It is usually faster and often more cost-effective for a medical service provider to repurpose an existing building than to build a new one. Yet, converting a nonmedical building into one for health care purposes is not always easy.
In 2011, California-based Kaiser Permanente decided to buy a one-story, 32,000-square-foot (3,000 sq m) building on the east side of Portland, Oregon, that had been occupied by now-defunct electronics retailer Circuit City. The building was in a good location, had easy access to public transportation, and met both the company’s goal to repurpose an existing property instead of building a new one and the city’s desire to establish five ecodistricts where redevelopment would have a lesser impact on the environment than new construction often does.
“The building didn’t have many windows, so we had to install several of them,” says Willy Paul, executive director of capital projects for Kaiser’s Northwest region. “Natural light makes a patient’s visit more enjoyable, which can speed recovery and helps to create a workplace that produces happier, more productive employees.”
The electrical system required extensive upgrades, he adds, because the TVs and stereos that Circuit City sold required far less power than do an electrocardiogram (EKG) and other hospital equipment. The heating, ventilation, and air-conditioning system also had to be overhauled because stores and other nonmedical facilities lack the high-tech systems needed to fight circulation of airborne viruses that can spread infection.
All these issues were foreseeable, Paul says, which made it a bit easier to work them into the project’s timeline and budget. “But after the work started, we got a surprise,” Paul says. “Part of the building had asbestos in it, and remediating the problem added a little more time and money to the job.”
The asbestos problem was remediated relatively quickly, and the Gateway Medical Center opened in December—about three months earlier than originally expected and 5 percent under budget. In keeping with a pledge made by Kaiser officials last year that all its future major construction projects would be environmentally friendly, the center has already earned Gold certification under the Leadership in Energy and Environmental Design (LEED) green building program.
Kaiser Permanente’s promise to meet LEED standards is significant, experts say, in view of the fact the organization plans to spend about $30 billion constructing 100 new hospitals and MOBs by 2023. It cost about $2 million to bring another Kaiser medical facility in the Portland area up to Gold certification, Paul says, but the group will recoup the expense relatively soon, in part through tax rebates, the savings associated with a 6.5 million-gallon (24.6 million liter) reduction in annual water use, and a solar-powered system that virtually eliminates the cost of lighting the parking facility.
“Kaiser’s announcement was a big boost for the green building trend because it’s a leader in the [medical services] industry and is known for its focus on keeping costs down,” says Gail Vittori, codirector of the Center for Maximum Potential Building Systems (CMPBS), an Austin, Texas–based nonprofit research and design firm dedicated to sustainable planning and development. “When Kaiser made its promise, it made a lot of smaller medical groups take note because Kaiser wouldn’t make such an upfront commitment to paying more for ‘greening’ if they wouldn’t recoup those costs later.”
To show that building an environmentally friendly medical facility costs little more than traditional construction, Vittori cited “Demystifying First-Cost Building Premiums in Healthcare,” a recent CMPBS study conducted with the help of design giant Perkins+Will’s New York office that involved interviews with project teams of 15 LEED-certified hospitals completed between 2010 and 2012. The report found that building to LEED standards added an average of only 1.24 percent to overall construction costs; the increase was an even lower 0.67 percent for facilities with more than 100,000 square feet (9,300 sq m) of space thanks largely to their economies of scale. “That’s a small premium to pay for all of the savings a hospital will get down the road,” Vittori says.
Few new megaprojects, green or otherwise, are planned for urban areas. The largest is in New York City, where a joint venture of the renowned medical training arm of Hunter College and the Memorial Sloan-Kettering Cancer Center will break ground soon on a $1.7 billion, 1.15 million-square-foot (107,000 sq m) medical complex on Manhattan’s upper east side.
The deal was approved in November after nearly ten years of planning and negotiations between the joint venture and city officials in Manhattan to agree on a complex plan that involved both a land swap and cash transfer. “I obviously wish the project could have moved forward faster, but this represents yet another step toward improving the health and well-being of New Yorkers,” says Hunter College president Jennifer Raab.
While Manhattan is bucking the trend with its large new urban medical facility, officials in tiny but fast-growing Dickinson, North Dakota, have decided to go in the other direction. They are planning to replace the community’s big hospital—built in the 1950s, when patient stays were much longer—with a facility half the size that will allow doctors and administrators to deliver services on a more cost-effective outpatient basis.
Limiting the new St. Joseph’s Hospital and Medical Center to a modest 25 beds allows the city to take advantage of a federal law designed to help small rural facilities by reimbursing them with cost-based Medicare payments rather than the program’s lower fixed rates, says St. Joseph’s president Reed Reyman.
“It’s hard for the community to understand why the new center will be smaller,” Reyman says. “But we don’t look at this as downsizing. We prefer to call it right-sizing.”
Architectural amenities and floor plans of medical facilities are changing, too. Exteriors now often include such amenities as large fountains and coffee bars to make a visit less formidable than it was at old-fashioned, monolithic properties.
Patient rooms are generally getting smaller, most medical architects say, a trend fueled by Obamacare’s emphasis on preventive-care and outpatient facilities rather than beds for overnight stays. Single-bed rooms are becoming more prevalent, reducing the risk of exposure to airborne viruses and easing a patient’s stress—which in turn can speed recovery.
Technological advances are also shrinking the amount of space needed to provide key services like X-rays or even CAT scans, while millions of square feet of space once needed to store medical records can be transformed into patient rooms because computers often allow a patient’s entire medical history to be accessed with the swipe of a small card.
Developers of new projects are concentrating on flexible designs to accommodate fast-moving technology. “Some buildings are partially obsolete when they open, and nearly every health care structure will be obsolete in some way before it has completed its useful life,” according to Health Care at the Crossroads, a white paper compiled by the nonprofit Joint Commission, an Oakbrook Terrace, Illinois–based group of public and private experts from various medical fields.
Financing for new projects and acquisitions is more plentiful today than it was just a year or two ago, most experts say, as nearly all types of health care–related facilities regain favor among lenders and investors. In one of the biggest recent deals, National Health Investors (NHI), a Tennessee-based real estate investment trust, agreed to pay $491 million to acquire a portfolio of 25 independent living facilities in 12 states from subsidiaries of Florida-based Holiday Acquisition Holdings. The 5.18 million shares of new public stock that NHI issued to help fund the deal were quickly snapped up by investors.
David W. Myers is a nationally syndicated writer in Los Angeles and a former reporter for the Los Angeles Times and the Wall Street Journal.