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Healthcare Real Estate News and Information

Forecast 2016  - Healthcare Real Estate Trends
  By: BETH YOUNG
Senior Vice President
Colliers International | Houston
Contributing Author

 

 

Many 2016 healthcare trends will continue from 2015; but some trends will be more noticeable. Overall, medical providers want to be more accessible to patients, provide better care and lower expenses. For real estate investors who focus on healthcare properties, here’s a list of what you may expect:

1. The greatest demographic factor to affect healthcare: age! Everyone knows about the Baby Boomers and the effect they will have on healthcare; but did you know 35% of all men over age 25 are considered obese. The work/life balance is now more important than compensation. As people age, they move closer to their children. Family members are making choices for their parents. The demographics in the U.S. will continue to evolve, so developers and landlords will adjust and put more emphasis on flexibility for their clients.

2. The greatest amount of ambulatory care or outpatient care is occurring off-campus or away from the main hospital. Acute care (inpatient/in hospitals) is shrinking; ambulatory is growing. Urban locations are expensive - the cost is cheaper in the suburbs.

3. There has been a narrowing of the gap between cap rates for various healthcare property types. The world capital markets and the lack of available properties for sale are driving this change.

4. Institutional investors have moved toward real estate and view medical real estate as a stable alternative. Investors will underwrite the operator in addition to the real estate to make a good investment. They will seek to understand the operation of the tenants/health systems (hospital systems), their ebitda, whether they are in or out of network and their ability to be a good long-term risk.

5. Average national cap rates are still around 7 % with plenty trading higher; but some investors are dealing with cap rates in the fives. Rising interest rates will affect cap rates; but there is so much demand for this sector that the market can probably absorb 50-100 basis points before cap rates increase. A strong health system's hospital at a 6% cap rate for a 20-year hospital lease is priced at a cheaper value than, for instance, 4.5% cap rate for a trophy office building. The reasoning is a hospital would decline in value due to obsolescence more quickly than a high-quality office building.

6. We are facing total uncertainty and an unknown revenue stream in the healthcare industry. The government has become the majority payer in the industry, and it is expected that they don't plan to take on more payments under the new Affordable Care Act. 

7. Developers’  viewpoint: Hospital campus driven deals two to three years ago were in the eight caps. Now offcampus credit-tenant leases with a health system are in the sixes or lower. Developers’ IRR is now going into lower teens or single digits. Their debt cost is higher than yield in some cases. They underwrite based on the dividend yield if held ten years. Renewal probabilities are a big factor. Developers are finding that an 80% chance of renewal isn’t a good assumption any longer because doctors are moving more often to new buildings with newer systems.

8. Lease renewals are down due to functional obsolescence for medical tenants. The physician groups that were bought by hospital systems are in place now, but will be moved to higher quality functional MOBs in the future. Independent physicians are being stressed on renewals based on how much they can afford to pay. Not all doctors can handle rising lease rates. There will be more shared space for clinics or multiple doctors. Some will want timeshare, co-locating or merging of their businesses.

9. Developers will act as a "trusted advisor" to health systems more often. Otherwise, they will have to compete with health systems who can develop their own buildings and then monetize them once they're occupied.

10. Changes with health systems: Hospitals compete for market share by following the dollars and following the people. By following people with great payer mix, it usually includes some high growth areas - good communities. They’ll acquire other hospitals and take insurance whether it’s private or government based. They are providing cancer care, imaging, and other specialized care in the suburbs, although the cost is high for the systems. One system executive said that in 2008-2009, there were twice as many patients in their hospitals compared to their hospice care locations. In 2015, there were more in the hospice care because systems can't get reimbursed for services thru the hospitals as well as through hospice care.

11. Financing - there will be more joint ventures between systems and providers.

12. Net-leased sales by physicians for surgery centers and other medical properties require the right buyer because the doctors want a good long-term relationship. Sophisticated buyers and sellers find it very interesting that there are so many buyers buying LTACHs (long-term acute care hospital), SNiFs (skilled nursing facilities), and post-acute care facilities without really knowing the operators, which is key to the long-term success of the facility.

13. Other hot property types: free-standing ED’s (emergency departments/centers). Texas and Colorado are expanding in this area quickly. The idea is to grab the patient, brand them as your client, and keep them in the health systems’ in circle. These properties are here to stay. They are like specialty hospitals were ten years ago - no one understood them. However, they must have good coverage ratio and a strong operator to last in the long run.

14. Freestanding EDs (FEDs) and urgent care centers seem fragmented and you could see some consolidation long term if they don't have a health system backing. It’s the retailing of healthcare. They are in strip centers, in front of big box retail, and the care is getting closer to the patients' homes. It's a ten million dollar investment to open an ED and grab market share. ED rents need to be in a lease-rate range that could be backed up with a retailer if the ED or urgent care operator fails. Investors must check rent comps.

15. REITS are bigger now, so they need to buy bigger transactions. Some REITs say they're carrying elephant guns - but there aren't many elephants out there.

16. The triple aim: better access to higher quality healthcare at a lower cost.

17. Health systems have sophisticated real estate departments; however, they may require help dealing with the need for cash. There's a real "speed to market" need to get on a good corner, because a competitive health system will be planning to be on the opposite corner.

18. Additional parking solutions: When beds increase, parking needs increase. Onsite is not going to be an option in many cases, so hospitals are getting leases or easements to increase parking.

19. The pure multi-tenant building is a dinosaur. It will be replaced with hybrid buildings: 50% system-employee space, 50% independent private doctors. It gives the independent doctors flexibility, and the ability to transition to hospital employment on a gradual basis so they can be comfortable with the change. The interior design is very different: one receptionist will escort patients to their appointments in the building for the day. Patients will be in a full continuum of care.

20. Many developers are doing large single-tenant projects.

21. The focus is shifting toward health and wellness from fees for services such as surgery and treatment of illnesses. Some healthcare companies are partnering with others that focus on wellness rather than making operational changes.

22. Biggest mistakes in Wellness - doing a lot of homework on the market and then not paying attention to it. Many operators take the surveys and study them, find out they may need a gym or basketball court, and then decide the cost is too high to ever pay off - which may not be the wisest decision for the long-term.

23. Indication of an uptick for development: Attorneys are seeing more rights of first refusal on land, options to buy, etc.

Overall, we’ll continue to see plenty of money for healthcare property investments, but not enough high-quality properties on the market for all of the investors. That will encourage some investors to take more chances, and perhaps try out some value-add opportunities. The challenge will be to educate the sellers of challenged investments to be realistic about their pricing in a market with more investors than product.


About the author
BETH YOUNG
Beth.Young@colliers.com
Beth is Senior Vice President of Colliers International in Houston, Texas. She specializes in the marketing and sale of hospitals, surgical centers and healthcare properties including office, retail, industrial buildings and land.

Reprinted with permission from “Forecast 2016 - Healthcare Real Estate Trends” by Beth Young, 2016.  from REDNews.
 

   Subleasing Space May Be Just What the Doctor Ordered

BY  BETH YOUNG  | 06 JUNE 2016

During market downturns, mergers and acquisitions, and cost cutting - or even an early retirement - many tenants find that they have more office space than they need. Although this applies to tenants in multiple categories, I recently met with doctors who had opened more offices around a big city than they could maintain. Unfortunately, their monthly expenses included payments for excess space, improvements, furniture, equipment and extra personnel. Since they didn’t have termination options in their leases, the solutions included subleasing part or all of the extra space, assigning the lease to another tenant, or time-sharing - growing alternative, particularly for physicians.

Check With the Landlord

Although most leases require notifying the landlord of the tenant’s intent to sublease or assign the space once a prospective sublessee is ready to make a commitment, some leases require earlier notification. In this case, after checking their leases to make sure they had the option to sublease or share the office space, we notified their landlords and received the required prior written consent to move forward with a marketing plan. Even if the lease does not have a sublease or assignment option, most landlords will allow a tenant to sublease the space (turning the tenant into a sublessor) if the prospective sublessee qualifies under the landlord’s reasonable requirements.

Take Inventory

Since more than office space was available, we took an inventory and pictures of the optional furniture, fixtures and equipment (including telephones) that could be offered for an additional amount of rent each month (or even purchased), providing the sublessee with a ready-to-go office. The marketing material also included floor plans and wide-angle shots of the rooms, building and surrounding area, plus an extra note about available personnel.

List Your Space in the Right Place

Offering available office space to the right prospects requires placing the information on multiple online listing websites and getting creative with targeted advertising. In this case, I found a simple local website that allows doctors or their representatives to provide basic information about time-sharing or subleasing opportunities to fellow physicians. Ads in industry publications also provide another good source of prospects.

Most tenants who need office space are introduced to the available options by their tenant representatives who research the market using detailed filters. The tenant’s representative expects to be compensated for bringing the sublessee; and in most cases, the brokerage commission, which is usually a small percentage of the gross rent for the sublease and paid by the sublessor, is divided between the sublessor’s broker and sublessee’s tenant representative.

Know What the Market Will Bear

If a tenant has been in the office space for several years and lease rates have increased in the market, it may be possible to sublease the space for more than the sublessor is currently paying. Check the lease to make sure any profits (after marketing costs including brokerage fees) over the current lease costs may be kept by the sublessor, or split with the landlord. In most cases, the sublessor can expect to sublease the space for less than other space in the market or building, since the sublessee will probably need to accept it “as is.” When tenants lease directly from landlords, they often receive some custom improvements to the available space to incentivize them to lease at that building. Most sublease options are enticing because of a lower price, particularly if equipment or furniture can be included at a minimum cost, or even for free.

Consider Time Sharing

Time-share is attractive to smaller tenants who need space only a few days a week. These options can be good choices for start-up businesses, business owners who aren’t ready to commit to an executive suite, or business owners that need another location in town, but aren’t ready for a full lease. Having the ability to use office space and perhaps a conference room, business or industry-specific equipment (like installed medical equipment) and available personnel on a half-day or daily-rate basis can be the perfect, cost-effective solution.

In the doctors’ case, they were able to break even on the cost of the lease payments and brokerage fees through a sublease for the remainder of their lease term. They offered some medical equipment and furniture to the sublessee to use during the Sublease term at no additional cost. That extra incentive more than justified a current market rate, which was higher than the negotiated rate in their lease.

So when you need to get rid of extra office space, consider what else would make it attractive to a tenant needing something similar. Furniture, fixtures, equipment, in-place staff, and good deals on price - all will help when competing against vacant, more expensive options in the commercial lease market.

Beth (CCIM, LEED AP) is a healthcare real estate advisor to health systems with a specialty in the sale of investment properties including hospitals, surgery centers and medical office buildings. She was a former pilot, professional pianist, and dance instructor who co-owned a 25-thousand acre ranch in Wyoming before flipping Texas real estate to fund her early brokerage career.

More Topics:

Update on the MOB Investment Market - Q3 2016

by: 
By Beth Young
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Read More

Subleasing Space May Be Just What The Doctor Ordered

by:  Beth Young
Colliers International, Houston

During market downturns, mergers and acquisitions, and cost cutting - or even an early retirement - many tenants find that they have more office space than they need. Although this applies to tenants in multiple categories, I recently met with doctors who had opened more offices around a big city than they could maintain... Read More

MidYear 2016 Houston Healthcare Market Research

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Healthcare systems continue to expand into the suburbs as population grows. At least two facts come together to make a very healthy medical real estate market:
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 (2) the Accountable Care Act requires health care providers to improve care while reducing expenses.
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Leasing medical office space: Negotiate for long term but plan for change

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As medical practices move to traditional retail and office spaces, and as urgent care centers continue to grow, understanding the complexities of lease arrangements and spelling out the needs of a busy and changing medical practice take on even greater financial importance for physicians.   (Includes a Lease negotiation checklist)   Read More    

6 Reasons Renting Medical Office Space May be Better Than Buying

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Forecast 2016 - Healthcare Real Estate Trends

by:  Beth Young
Colliers International, Houston

Many 2016 healthcare trends will continue from 2015; but some trends will be more noticeable. Overall, medical providers want to be more accessible to patients, provide better care and lower expenses. For real estate investors who focus on healthcare properties, here’s a list of what you may expect: cost cutting - or even
Read More

“Leasing medical office space: Negotiate for long term but plan for change”

by:  Gerald H. Morganstern, JD

As medical practices move to traditional retail and office spaces, and as urgent care centers continue to grow, understanding the complexities of lease arrangements and spelling out the needs of a busy and changing medical practice take on even greater financial importance for physicians.   (Includes a Lease negotiation checklist)   Read More    

6 Reasons Renting Medical Office Space May be Better Than Buying

 Read More  

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