New Healthcare Legislation Forces REITs into Reform

More insured Americans means more demand for medical care, largely through primary care and other outpatient services.

Recently passed healthcare reform legislation signals significant industry changes over the next several years. This in turn will have implications on the U.S. healthcare REIT sector.

More insured Americans means more demand for medical care, largely through primary care and other outpatient services. Over time, this will require additional space to house not just these providers, but manufacturers and operators of lab space. This should present long-term benefits to several metropolitan areas where pharmaceutical and biotech manufacturing and related lab space have clustered, including San Francisco, San Diego, Boston, New York City, Baltimore/Washington D.C., and Raleigh/Durham.

Commercial real estate investors have traditionally demanded higher returns on investment for owning hospitals given the high level of regulation and challenging operating fundamentals. Once the new healthcare legislation is fully implemented, however, acute care hospitals will no longer have to carry the heavy burden of treating large numbers of uninsured Americans, which will make them more attractive as investment opportunities. There may also be an increase in the growth rate of pharmacies as the aggregate number of prescriptions is anticipated to increase along with the jump in insured Americans. This could help revitalize neighborhood shopping centers currently struggling with vacant stores.

Going forward, these factors will be important to consider when considering commercial real estate investment. REITs, along other real estate investors and lenders have accounted for the perceived risks associated with government reimbursement rates by structuring leases and loans more conservatively so that they could withstand a sizable cut in reimbursements. Therefore, REITs should generally remain well protected even as some reimbursement cuts are pushed through. It is also conceivable that good operators will be able to manage through the reimbursement declines by reducing expenses and generating other sources of revenue.