- Jul 05, 2012
The passing of the Affordable Care and Patient Protection Act will produce some solid opportunities for commercial real estate investors while healthcare providers continue to innovate and focus on health outcomes versus services provided for the ill. More than $1 billion in grants have been allocated to support state exchange readiness, and Medicaid spending is expected to total $4.2 trillion between 2012 and 2021, according to Kelsey Brimmer, associate editor of Healthcare Finance News. Twenty-three million new individuals expect to have insurance and 17 million people will be enrolling in Medicaid during the same period.
But before you run off and convert your property into something healthcare-related, consider your strategy. The act is meant to reduce expenditure. A lot of the monies spent so far have focused on electronic medical records and IT infrastructure, not how to reconfigure floor space in a doctor’s office. There are also many factors to consider for each type of property you own or are considering purchasing.
Successful medical office transactions should be associated with a local hospital or an Accountable Care Organization (ACOs mostly comprise hospitals, physicians and healthcare professionals). If you cannot assemble that in your strategy, you will need an owner-occupied play with some tenants in the mix to reduce the operating cost of a building, at least until the syndication market gets healthier. While these facilities are similar to commercial office buildings, they require more plumbing, electrical and mechanical systems to accommodate multiple exam rooms that may require sinks in every room, brighter lights and special equipment such as medical gases.
If you’re thinking you can get several medical practices into your office building, consider the reality that hospitals and ACOs are becoming an integrated delivery system. Multiple specialties will be just an elevator ride away. This means they’re acquiring practices, and the solo practitioner hanging out their own shingle will likely become extinct. It will be difficult to find larger tenants without the hospital or ACO connection. Trying the “me too” approach and simply converting your property to give it a medical or healthcare theme is like swimming upstream when trying to grow your net operating income in a challenging market.
Because I have been bullish on healthcare for several years and have written a few white papers on it, I often get proposals for a multi-family conversion to an assisted living or skilled nursing facility. These can be challenging, since most apartments do not have a communal area or a commercial kitchen. Trying to explain to an appraiser that the operator will be “ordering in” all the time from restaurants to take care of clients’ dietary needs is a non-starter. The high cost of food won’t be controlled. And the zoning likely will not permit communal dining, either. If you’re trying to get HUD Section 232 or 232/223(f) money for your renovation or purchase, communal dining is a premier piece of the puzzle. If you have never run an assisted living facility before, you’ll need to have a proven operator in place to get any attention from lenders.
Real estate is a tool to organize care. Healthcare providers don’t necessarily want to become landlords, which offers an opportunity to manage, own and find new tenants. There will be innovation in medical office design to create multi-specialty clinics throughout neighborhoods to diminish hospital visits. Services to the patient will move to a variety of locations. This means having a community hospital clinic in your retail center to complement your retail anchor tenant is a smart strategy, especially since the Baby Boomer effect shows that this age range is accessing the healthcare system four times as much as any other age group needing services.
Healthcare is need based and recession resistant. Tenant retention is higher because leases are longer. Even though cap rates are compressing, rates are low enough to keep buying and ride this wave of change into 2021 and beyond.