Healthcare Real Estate: The Consolidation Trend

A photo of the sign out front of University Ho...

In the wake of the recent Healthcare and Real Estate Summit held in Chicago, a clearer picture is beginning to form of healthcare business trends and property dispositions going forward nationally under the Affordable Care Act (aka “Obamacare”).  The commercial property professional in most markets is a stakeholder in these trends in a few different ways.

Healthcare Property Consolidation 

The property market in the hospital and health care provider segment faces a series of changes that are at bottom designed to provide greater efficiency in delivery of healthcare services.   While the changes are not sweeping or alarming, nor do they reflect anything like a “takeover” of health care by entities other than health care providers, they are significant in property terms because of the trend of consolidation.

The already-existing national trend of hospitals establishing off-campus outpatient facilities and specialty practices is dovetailing with the business plans and exit strategies of independent practices, who are finding their profitability declining.  Owing to the rising costs of medical care provisioning –  driven by everything from very unwieldy and complex billing struggles to the wider economic picture where six out of ten US doctors reporting that their patients have difficulty paying for care - entrepreneurial physicians will increasingly see buyout offers from hospitals as attractive way to get out from a lease or to sell a building.

Sharing Of Resources Includes Square Footage

Controlling of costs and maintaining high quality of care means an increase in sharing of developed space.  The electrical, plant, IT and environmental requirements of healthcare construction represent sunk costs that need to be leveraged across a greater number of health care practitioners going forward.  Beyond that, stringent requirements for information technology updates for medical recordkeeping and the aforementioned billing will continue to be a major driver for the sharing of health care delivery facilities meaning labs, waiting rooms, exam rooms and the like.

The commercial property strategy that wins is one that finds solutions  for sellers and buyers in support of the consolidation trend.

Doctors Wondering If They Should Own

On the sell side, drivers of the consolidation trend are reflected in the position paper “Should Docs Own Office Buildings?”, by Robert Rosenthal and Barry Weinbaum of Pacific Medical Buildings. While certainly written from the point of view of advocating such ownership, the paper’s description of exit strategies for doctors looking to cash out of such investments rings like a bell for the commercial broker with experience in IRS 1031 tax-deferred exchanges.  If the prevailing trend is doctors on the way out of such properties in advance of hospitals and healthcare providers moving headlong to a distributed model driven by cost-sharing, the commercial REALTOR® would do well to watch the local market for examples and be ready to provide a key role in the business plans of doctors.

 

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19. November 2012 by Wayne Grohl
Categories: Future Trends, Healthcare Real Estate | Tags: , , , , , , , , , | 16 comments

Comments (16)

  1. MOB’s continue to be the hot ticket in investment real estate. They offer stable and long term income for investors.

  2. Part and parcel of the health care real estate consolidation trend is the purchasing by REITS of financially troubled as well as smaller, independent healthcare facilities, including hospitals, medical office buildings, skilled nursing and assisted living facilities.

  3. My thoughts in the future trends, healthcare realestate. I believe the Investor will Prevail in this everchanging market. The Doctor’s and all Professional’s will revisit the ownership of their own offices and control all expences. Having offices in high rises and leases with no end to the high cost of living will be readjusted with a new purchase of property. The tax allowance will work out at the begining and at the end of the investment. The success of Investment Realestate will stay a constant focus while rates are low and the recession drives the tenants to be owners.

  4. This current consolidation trend is surely just the beginning of the changes coming down the pike as the ACA is rolled out. Long term trends are going to be difficult to quantify or rely upon until some of the unforeseen consequences play out. Still — lots of opportunities for commercial investors and RE firms.

  5. Funny how this kind of thinking falls right in line with NAR’s current REThink The Future of Real Estate scenario planning workshops. I agree with Sonja above— I, too, believe that the Investor will prevail in this ever changing market.

  6. It’s amazing how many senior care deals have been coming my way over the last 6 months. This is a a gold mine for brokers — with memory care opportunities leading the pack.

    • Indeed – senior living and care is a $250 billion(!) market – you couldn’t more on the ball there. Also thanks for telling me about “memory care” – first I’ve heard the term. Let me know if you’re interested in talking about some of these deals for the blog.

      Thanks for reading!

  7. We are already seeing this trend happen. Tax deferred exchanges are becoming more prominent than we have seen in awhile. Small practices are giving in to the larger more dominate providers.

  8. Do you not believe Obamacare will, once certain things which are coming out will make it more difficult to make the market more profitable, or is it viable for the doctors I know more are selling out to the hospitals here in Mississippi.

  9. We have seen a major uptick in medical condo sales lenders have special medical financing which include their buildout.

  10. Senior care and living is a huge market and will be more important in the future. I have seen the trend of ownership.

  11. Having and having had healthcare issues of my own, Obamacare scares me to death. I don’t know at anytime that the government has ever done a good job of managing anything or done what was truly in our best interest. At best it is someone’s interpretation of our best interest. Someone who inevitably disconnected from reality. Consolidation in the industry is counter productive to the competition that was so much of the goal for the plan to be successful.

  12. Consolidation sounds like monopoly to me. Hospitals are buying physicians entrepreneurs to reduce competition. But patient will pay for high cost to pay for this transition, so what is the problem. In the process, commercial Real Estate will have more vacant spaces from Doctors moving their practices to hospitals. Vacant spaces eventually may be used in the booming elderly care industry, if there is money to invest in TI that is. Consolidation may work if everyone, including banks owning the mortgage, work together, but maybe not if greed plays its ever-dominating role.

  13. In our tertiary market more physician practices are sold to hospitals and doctors become employees rather than independent providers. Some real estate goes with the deals on lease back arrangements and some comes on the open market for adaptive re use.
    This trend leaves many patients with fewer choices for care as providers look more and more to the bottom line.

  14. Tahoe Forest Hospital in Truckee, California has a visionary CEO who has implemented these physician conversions for the last 4 yrs. With the increasing cost and uncertainty of medical care the proactive Doctors only hedge is to make these moves, sooner rather than later. Extended care, rehabilitation centers, and assisted living are in extreme demand and will be for decades to come. These needed services are not only do to boomers but also due to more singles and childless adults needing help as they age.

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