There’s no doubt that COVID has left its mark on the healthcare industry. There were significant disruptions to service delivery early in the pandemic, which trickled down to medical office real estate decision-making. However, as the pandemic winds down, there seems to be a light at the end of the tunnel. By all indications, the changes ushered in due to the pandemic will bode well for the future of healthcare real estate.
This article examines how the COVID-19 crisis impacted the healthcare real estate market, which of these impacts stand to last, and how that will influence medical office investments moving forward.
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The Impact of COVID on the Healthcare Real Estate Market
The global COVID-19 pandemic has left a significant mark on nearly all commercial real estate product types– healthcare real estate included.
Most medical office real estate transactions ground to a halt during the first several months of the pandemic- when there was less certainty around the virus and how it would impact economic growth and global healthcare decisions. Leasing activity stalled. Acquisition and dispositions were put on hold. Mergers and acquisitions that would affect real estate decisions also paused.
One of the primary reasons for the pause is that COVID immediately impacted healthcare providers’ revenues.
By May 2020, the healthcare sector had shed 1.5 million jobs and grappled with the dual threat of unexpected emergency planning expenses and abrupt revenue declines. The federal CARES Act injected $2.2 trillion into the economy, and this certainly helped negate the impact (to some degree) on healthcare operations. However, many healthcare providers still saw declines in revenue as elective surgeries, “health tourism,” and even more traditional in-patient visits dipped.
According to TransUnion Healthcare, by mid-August 2020, in-patient volumes were down 8%, and emergency room visits were down more than 25% from the year prior.
However, by early- to mid-2021, healthcare real estate activity began to pick up again as the national economy stabilized. In fact, the sector has started to experience both price and rent growth. Now, investors see just how vital healthcare properties are more than ever. They are undoubtedly one of the most essential parts of our nation’s healthcare infrastructure.
What’s more, since the development of new healthcare properties was put on hold during the depths of the pandemic, there is now a growing shortage of medical office property for sale or lease. Well-located properties are in huge demand, with investors and tenants alike vying for these spaces.
The Advent of “Hospital at Home” Companies
One interesting trend to come out of the COVID-19 pandemic is the growth of “hospital at home” companies like Nashville-based Contessa and Boston-based Medically Home. The hospital at home model offers people who would typically need in-patient treatment for certain conditions the ability to receive acute-level care in their homes. This model was already being tested pre-pandemic, but COVID has fueled its growth ever since.
Several startup companies have sprung up to provide logistical support and technology to help facilitate hospital-at-home programs. Medicare, which previously did not pay for acute care services provided outside of hospitals for fee-for-service beneficiaries, now allows providers to bill for acute treatments delivered in surgery centers, hotels, or other non-hospital facilities. Many are expecting this to be extended to critical care provided in-home, which would undoubtedly lead to an uptick in the use of this model.
On the surface, it may seem that growth in the “hospital at home” model would adversely impact the need for more traditional healthcare real estate. However, in many instances, primary healthcare providers are investing in this model to supplement their core service offerings. For example, Kaiser Permanente and the Mayo Clinic recently invested $100 million into the Medically Home Group.
If high-quality care can be delivered in a lower-cost setting, this will ease some of the revenue constraints hospitals face and may free up capital to invest in longer-term real estate expansion plans. Moreover, clinicians that leverage the hospital at home model may need to expand their back-office functions and would likely do so by leasing more traditional medical office space in more affordable suburban and even rural locations.
However, it remains to be sure if the “hospital at home” model is scalable. Both supply chain management and staffing remain obstacles to the model’s growth. Sending a doctor from one person’s home to another is not particularly efficient. Moreover, these programs need a critical mass of patients to be viable. Nevertheless, it’s a trend worth monitoring as it may impact healthcare real estate in the years to come.
Shifting Care from Hospital to Outpatient Clinics
Another healthcare trend that has accelerated in the wake of COVID is the shift from the care provided in hospitals to care delivered at more affordable outpatient clinics.
During the depths of the COVID crisis, many patients did not feel comfortable visiting large, urban hospital campuses where they could potentially risk exposure to COVID-positive patients or staff. Instead, many began receiving similar care in outpatient clinics, such as ambulatory care settings. Patients soon realized that these suburban clinics, generally located closer to their homes, were, in fact, more desirable than having to fight traffic, find parking, and then navigate a hospital labyrinth. In short, outpatient clinics proved to be more convenient for the masses.
This trend will undoubtedly impact the future of healthcare real estate. As more people seek care closer to home, the need for outpatient medical office buildings or ambulatory care facilities will rise. These facilities are rarely built on a speculative basis, and therefore, the construction of new healthcare properties tends to move slowly. With the absence of new construction, some providers may look at repurposing big-box retail outlets, warehouses, or traditional office spaces for medical office space.
Are you a savvy investor hoping to expand your portfolio and build your wealth by acquiring a selection of top-quality medical office buildings or other healthcare real estate? Our investment experts at Alliance are here to help you select the best possible properties to help grow your income going forward.
How Technological Innovation Will Impact Healthcare Real Estate
There have been several advancements in technology – some sparked by COVID, other not – that are sure to impact healthcare real estate (at least to some degree) in the future.
A few trends worth watching include the growth of telemedicine and the demand for sustainable building design features.
How Telemedicine will Impact Medical Office Buildings
In early 2020, fewer than 1% of all healthcare visits were held virtually. In a six-week window, this number skyrocketed to 15%. Patients and providers alike opted to use telemedicine to lower the risk of COVID-19 exposure during the depths of the pandemic.
Initially, this trend spooked those in the field of healthcare real estate. Would demands for medical office space forever be lower?
As it turns out, these fears were unwarranted. By Labor Day 2020, most people were back to visiting their healthcare providers in person. How telehealth impacts healthcare real estate moving forward remains to be seen. Most healthcare industry experts agree that while the use of telemedicine will likely be higher than pre-pandemic, it will be used to supplement traditional in-patient visits. Therefore, it is not expected to dramatically impact the need for medical office buildings in the near future.
Instead, it may influence the design and fit-out of medical office buildings in the future. For example, patient waiting areas may decrease in size if patients become accustomed to staying in their cars until receiving a text message that their clinician is ready to see them. The IT infrastructure at medical office buildings may need to be upgraded, as well, to accommodate for the occasional use of telehealth.
There are a few exceptions worth acknowledging. Some healthcare experts predict a more permanent shift to telemedicine for specific services, such as behavioral health.
Moreover, the remote work trend may move some back-of-house functions (such as medical billing and coding) out of traditional medical office buildings and into people’s homes. This model has proven to work well during the pandemic and could save providers money by shedding the leasable space they once needed for employees working in-office.
Demand for Sustainable Medical Office Buildings
Healthcare providers are facing increasing pressure to “green” their operations. One way to do so is by designing highly sustainable medical office buildings.
There is a wide range of ways to go about greening medical office buildings. Newer MOB campuses are being thought of comprehensively, from energy reduction strategies that include LED lighting, more natural lighting, and the installation of solar canopies to sustainable building materials like heat-reflecting roofs.
Many MOB developers are designing their campuses to promote health and wellness for patients and staff. This could include walking paths, healing gardens, and courtyards where people can gather, meditate and exercise.
These building and MOB campus enhancements can collectively move projects closer to a net-zero future– something investors have been paying keen attention to in recent years.
Of course, these sustainable design features carry a cost premium. For example, insulated tinted glass often costs more to manufacture and may be more complicated to install than traditional, thinner un-tinted glass. Heavier insulated glass may also require more durable framing to keep the glass in place. Therefore, these sustainable design decisions must be made carefully, with the energy savings and wellness benefits quantified for investor consideration.
Retirees Will Influence How We Look at Healthcare Properties
Another factor that will undoubtedly impact future healthcare real estate decisions pertains to America’s aging population. An estimated 10,000 Americans are turning 65 years old each day. As members of the Baby Boomer generation keep aging into their 60s and 70s, their need for health care increases– as does their demand for housing that integrates healthcare services.
As people age, they often encounter challenges remaining in their long-time homes. Their bedroom or only bathtub may be located on the second floor, and over time, getting up and down the stairs will more than likely become much more challenging. Those with limited mobility may find it challenging to navigate small spaces, especially if they are wheelchair-constrained. The average American home is not set up with appropriate ramping, doorways that accommodate wheelchairs, and other accessibility features that make aging in place feasible.
Therefore, it is expected that demand for senior housing will increase in the years to come. Specifically, there will be demand for senior housing that overlaps with healthcare services, including assisted living and memory care facilities. Campuses that provide a continuum of housing alternatives– ranging from independent living to assisted living, nursing home facilities, and memory care– are expected to be especially popular among those looking to “stay put” for their latter years.
Growth of the Healthcare Sector
Despite the changes expected to come to the healthcare sector, the overall outlook for the industry remains incredibly bright. This is fueled in part by America’s aging population. People need more medical care as they age, and with the average life expectancy on the rise, people will not only need more care over time, but they’ll need more care for longer.
As evidence of the sector’s growth, consider this: U.S. national healthcare expenditures reached $4.1 trillion in 2020 or $12,530 per person. According to the Centers for Medicare and Medicaid Services research, this is estimated to reach $6.2 trillion by 2028.
According to a survey of U.S. adults in March of 2021, “Ease of access to care” was the top priority among 89% of people. This means that the migration of medical office and healthcare real estate to suburban and rural locations is sure to accelerate in the future, which will create opportunities for investors looking to add medical office buildings to their portfolios.
Final Thoughts and Considerations to Keep in Mind
Given the current positive outlook for the healthcare sector, it’s no wonder investors are clamoring to add healthcare real estate to their portfolios.
What was once considered a niche industry that attracted investment from a narrow group of legacy investors has since sprung open and attracted interest from the masses.
What’s more, the disaggregation of the healthcare industry has created opportunities for investors of all types. While institutional investors and healthcare real estate investment trusts (REITs) may continue to focus on hospital-affiliated properties, there is a need for smaller medical office buildings, “MedTail” properties, and other healthcare facilities that are accessible to the masses.
Investing in top-quality medical office buildings or other types of healthcare real estate can be tricky. Thankfully, our team of investment professionals at Alliance is here to help you find and select the best possible properties to diversify your portfolio and grow your future financial prospects.
Founder & CEO | Alliance Group Companies
Ben Reinberg is Alliance Group Companies' founder and CEO.
Since 1995, Alliance Consolidated Group has acquired and invested in medical properties with net leases between $3 and $25 million across the United States. With decades of commercial real estate experience, we take pride in committing to meeting the goals of our Sellers, as we consistently and seamlessly adhere to successful closings.