On Business - Healthcare Transformation Brings New Opportunities

Spring 2011

An aging population and the continuing shift to outpatient care – as well as pent-up demand created by more than a year of relative inactivity – should get the healthcare real estate sector back on track in 2011. We already began to see that during the fourth quarter, as total medical office building (MOB) sales volume topped $1 billion for the first time in two and a half years, according to Real Capital Analytics Inc. Likewise, most MOB developers say that the recent volume of requests for proposals (RFPs) foretells a significant up-tick in new projects this year.

But new MOBs might be quite dif­ferent from the third-party owned, multi-tenant facilities of years past. Healthcare reform is prompting pro­viders to reduce costs and increase productivity. That dynamic, combined with the decline of independent physician practices, is transforming the sector.

As more physicians become employ­ees, some hospitals might conclude that it is more efficient and cost-effective to own their own MOBs. That would reduce opportunities for third-party healthcare real estate developers and investors. But it would also create fresh opportunities for merchant developers, brokers and attorneys – particularly as we sort out these near-term changes. On the other hand, some providers might now be even more inclined to tap into real estate as a capital source if they have limited access to capital, or if they need cash for costly investments in their core businesses.

Increased pressure to cut costs will also accelerate the trend of shifting higher-acuity cases into lower-cost space, stoking demand for MOBs and other outpatient facilities. Many also believe that most stand alone hos­pitals and small health systems will be unable to compete in this brave new world. That is triggering a wave of hospital mergers and acquisitions, as well as a grab for market share. That will spur healthcare facilities’ re-branding and new projects in satellite locations – including the opportunis­tic redevelopments of vacated retail spaces.

Some future MOBs will be larger, as hospitals put more services under one roof to maximize collaboration and efficiency. But others might be downsized as administrators seek to control costs by driving more patient volume per square foot.