There was a short healthcare conference in Houston in May, and speakers ranged from developers and appraisers of medical real estate to the real estate directors of Houston's major health systems. Much was discussed about the effect of the Affordable Care Act on hospital systems and the trends that are affecting healthcare real estate. An interesting fact was that 17.6% of the GDP is in Healthcare; and $7 billion was spent in medical-office building transactions last year producing an average cap rate of 7.6%.
One panelist remarked that the marketplace will pay a premium for single-tenant medical office buildings (“MOB’s”) in primary markets, with cap rates often between 6% and 7%; and premier properties have even traded at cap rates in the low 6’s and high 5’s. Good quality multi-tenant medical buildings in secondary markets commonly sell at 7% – 8% cap rates.
A representative of a REIT that owns properties in our market said they evaluate MOB's by comparing tenants, location, and quality of the building. Buildings with strong-credit hospitals or health systems as tenants will produce the lowest cap rates or highest prices when sold. The location that has traditionally resulted in the highest sale prices is on-campus, or adjacent to the hospital. But now, the location is more about whether it is strategically important to the hospital's platform and the long-term plan to gain a larger market share. The quality of the building doesn't mean simply the quality of construction. Buyers are equally concerned with their acquisition being relatively new, functional, flexible, able to handle the newest ways of delivering medical care, and at least 60-70% leased at the time of the purchase.
More technically complex buildings in communities is a growing trend, often seen in sports-medicine facilities where treatment centers are being equipped with advanced imaging such as MRI's. Newer healthcare facilities have an advantage when they are expandable, flexible, and come equipped with medical gases and generators - providing mini treatment centers.
Landlords are always concerned about losing major tenants; but when the building is a specialized medical property, the risk for the owner increases. The question is raised, "What happens at the end of the lease if the tenant used the building for special purposes like a cancer treatment center?" Re purposing is difficult, but there are small niches that can work. That is one reason retail formats have become so popular for medical offices. When a medical tenant moves out, it can always be re purposed into typical retail.
There are many additional reasons retail is a leading trend for medical facilities. The most important is fueled by the new regulatory environment, requiring health systems to be more efficient, improve the quality of care and lower costs for patients. Locations in communities provide convenience; and studies show that procedures done in ambulatory surgery centers vs. hospitals can save patients as much as 50% while providing a better environment. Although some doctors still find it makes more sense to be located next to a hospital, many prefer the suburban locations because it is more strategic to their business. Good retail locations come with great car counts and visibility, but the lease rates are higher compared to hospital campuses.
One director or real estate for a health system said they take a proactive position in becoming an anchor tenant in some retail centers - an easy win for the systems which are provided with nearby complementary businesses and high visibility. Hospitals and health systems can provide patients with more preventative care and engage with them sooner in retail settings. Patients can often get up and recover more quickly when treated in outpatient facilities.
Although it is currently more common in Houston than other cities, the trend of outpatient centers in communities will continue to grow, as the number of inpatient facilities shrink. As more health systems merge or acquire each other, they are focused on capturing market share; so they will provide local emergency care, urgent care, and additional outpatient clinics in off-campus settings. (Urgent Care centers are set up to assist patients with an illness or injury that does not appear to be life threatening, but also can't wait until the next day, or for their primary care doctor to see them.) Texas allows groups that are not affiliated with a hospital to build surgery centers and outpatient clinics also. In addition, insurance companies are buying operators, hospitals, and insuring that their place is confirmed in the care of patients.
Health systems area also pursuing relationships with senior-living, memory-care and long-term care companies. Although residents of these types of facilities do not want to be located next to hospitals to remind them of their conditions, they do need to be near an acute-care facility hospital; and it is becoming more common for post-acute-care facilities (such as LTACH's or long-term-acute-care hospitals) to be located next to senior-living facilities.
Sustainability is also having an effect on new medical developments. SRI, or socially responsible investing, is being watched by Wall Street. A company's sustainability score correlates with the overall management score of a healthcare organization, like any other company. It quantifies the overall quality of a company. Many healthcare property owners who are developing projects choose to self-certify their buildings to mimic Energy Star requirements. Health Care REIT has a Green Arrow program that equips tenants with tools to reduce their energy use, recycle, and be more sustainable. LEED certifications come with a premium, but the development experts and owners of the buildings say you get a real "bang for your buck". One panelist said it is not as cost prohibitive as people who are not in the industry think, and the savings on operating expenses are significant.
When the Affordable Care Act was introduced, many health systems and hospital developers put the brakes on their master plans. But there are numerous examples of how the master plans are now moving forward including Memorial Hermann's 1.4 million square foot expansion in the Texas Medical Center ("TMC") and new campus coming to Pearland, CHI St. Luke's Health's future medical complex on 23 acres in Springwoods Village, and Texas Children's Hospital's recent purchase of land in The Woodlands where construction starts in June. In addition, Medistar's Bay Area Regional Medical Center, a 104-bed acute care facility, is scheduled to open on July 21st in Webster.
Health systems are split in their views about monetizing their MOB portfolios. Some see selling as a good way to make money off of the real estate and have already sold properties that were not considered "on-campus". Others don't plan to sell properties because of a lack of control. One panelist said if they could sell their properties to a landlord who would take the lease payments and let the systems operate the facilities as they want, they would sell more properties. Control and flexibility is important.
Future goals for the Texas Medical Center include creating opportunities that attract life-sciences research and clinical trials, development of residential living, a new hotel, and convenient live/work/play environments for the TMC's employees.
Published in June 2014 issue of REDNews