The Changing Needs of Healthcare Real Estate

In this fast pace world, consumers expect services readily available at convenient locations. This mentality, along with government mandates, is forcing healthcare providers to develop new strategies for the growing patient population while reducing overhead costs. Real estate could be a financial help or hindrance in adapting to this new way of practicing medicine.

Technology Facelift

Due to new technology regulations, the traditional medical office space is changing. Large rooms to store files are no longer needed; instead, walls are going up to create more exam rooms and waiting areas. All these new areas and existing spaces must be equiped to handle the technological advancements in both mobile medical devices and computers for medical professionals to input patient information. Reconfiguration can be costly for a tenant and there’s no way to ensure the improvement costs will be recaptured over a ten year term. This has proven an issue for larger practices and healthcare systems who must evaluate whether to take a longer lease agreement or buy the space to offset the cost of improvements. Tenant representatives or transaction managers are often consulted to ensure a more effective negotiation with the landlord.

Two Become One

Consolidation is the buzzword right now in health care. Independent doctors are being absorbed into bigger practices. Small practices are becoming larger, cross-disciplinary groups. The affiliation changes impact real estate holdings. As more physician practices merge in an effort to control their finances; groups are looking at their lease options. By partnering with a real estate advisor, practices can evaluate the cost benefits of leasing vs. buying.

Independent doctors who join hospital systems often fold their leases into their new contracts. Over the course of several mergers, healthcare systems can acquire hundreds of leases. These additional properties are difficult to maintain because they’re often not equiped for technology integration or the location is not ideal. A strategic assessment of a real estate portfolio can highlight assets worth the additional investment. In most cases, reducing the number of leases provides an economy of scales which reduces operating expenses.

Rent or Own

Since 40% to 50% of health care system’s total assets are real estate holdings new accounting compliances will bring additional pressures to reduce costs. FASB compliances will force companies to be more transparent by recording substantially all leases (including medical equipment) on the balance sheet. Health systems will find with these new accounting rules, there will be more options to either own properties or create new occupancy strategies.  An experienced real estate advisor can provide a tactical plan that determines whether to sell, leaseback, or get investors. A well advised strategic plan puts the health care system on a savings trajectory.

Inconvenient Changes

The next few years will see a major shift in how and where healthcare is provided. As technology and convenience for patients become top priorities, medical providers will be looking for capital to make changes. Real Estate, in the past, has been an undervalued asset, now it’s becoming a primary focus.