All signs point to an active year in healthcare as industry executives work diligently to advance their strategic plans in the post-healthcare reform/post-election era, according to Jones Lang LaSalle. The firm’s Healthcare Solutions group that specializes in healthcare capital asset strategy, capital markets, development and construction predicts:
- Planning for future capital investment projects will increase as systems look at ways to expand their footprint, improve delivery methods for quality care and reduce expenses;
- Medical office buildings will remain an investment favorite as superior healthcare real estate performance drives competition to source capital;
- Sourcing capital for new developments will be a top priority as some systems weigh the benefits of self-developing versus third-party development as a means for bringing projects to fruition.
“Many in the healthcare industry looked to the Supreme Court decision, the election and a resolution of the fiscal cliff to provide clarity and direction that would make the decision-making process easier,” said Pete Bulgarelli, chief operating officer, Jones Lang LaSalle’s Healthcare Solutions group. “Because this failed to happen, savvy healthcare executives instead are defining plans and pushing them forward.”
He added that sustainable cost saving measures driving operating efficiencies are becoming standard healthcare lexicon, helping to dictate how systems respond and move forward.
“We’ve seen a lot of planning in 2012,” said Jon Boley, vice president of acquisitions and development for HSA Commercial Real Estate and HSA PrimeCare. “A lot of the bigger systems and some of our clients have really been looking over their real estate plans, their outpatient service plans and formulating their approach. In 2013, we’ll see a ramp-up of actual implementation.”
Focus shines a light on planning
Scott Latimer, managing director in JLL’s Healthcare Solutions group, expects that 2013 will be marked by greater levels of confidence, growth and demand in the healthcare industry. The uncertainty of the past two years will have changed and most systems have a better idea of how they will be evolving under reform legislation.
“More strategic planning has taken place in the last few months than over the last several years,” he said. “Architects are tooling up for a major expansion in demand for their services. By mid-year 2013, they are supposed to be in a place where demand outstrips their resources.”
Capital investments will still be largely limited to those that build networks — through expansion of ambulatory care centers and/or mergers and acquisitions — or reduce cost. Although systems will return to planning on their campuses, investment in expanding hospital infrastructure is still a couple of years off. Yet one of the greatest challenges facing hospitals and healthcare systems is the cracking, eroding infrastructure prevalent in so many older hospitals.
“Over the last several years, cash-strapped hospitals and systems faced very difficult decisions about how to allocate precious resources,” Latimer said. “Among the considerations were improvements and fixes to hospital infrastructure or investment in ambulatory care and other outpatient facilities.
“The problem is that most infrastructure investments, while a necessary evil, don’t show a return,” he said. “Only the most critical projects were funded. As a result, the average age of plant has increased to levels that make a lot of people uncomfortable. It’s a very tough question. One is a matter of growth and opportunity, the other is a matter of determining when it is best to deploy the life boats.”
Medical office still the investment darling
Regardless of last year’s ambiguity, 2012 will go down as one of the most robust years in the acquisition and disposition of healthcare and related real estate. Jones Lang LaSalle anticipates that investment in this favored property sector will plateau in 2013, not for lack of demand for a sector that has outperformed almost all other property types, but because of a diminished supply of suitable investments.
“The high level of capital raised for healthcare property investment helped to sustain activity and drive up values in virtually all product categories,” said Mindy Berman, managing director of Jones Lang LaSalle’s Healthcare Capital Markets group. “Demand for everything from medical office buildings to senior housing projects will continue unabated in 2013 because of the tremendous returns they produce.
“The real question is what product is available,” Berman said. “Many vintage 2005 to 2007 medical office portfolios have changed hands, smaller healthcare REITs have been gobbled up by larger healthcare REITs and research estimates that 70 percent of class A senior housing product has changed hands.”
She noted the propensity for the sale of physician-owned real estate, explaining that these entrepreneurial investors understand the high value of their holdings and have been eager to cash in on returns. Other notable activity resulting in property changing hands would come through M&A activity.
“Regardless of healthcare reform, healthcare is changing,” Berman said. “Acquisition of physician practice groups and consolidations of hospital systems continue without missing a beat to create better quality of care, operational efficiencies and greater scale. Organic growth, particularly in this environment, isn’t likely but expansion through M&A activity is.”
“I think (M&A activity) is going to continue to occur especially as it relates to hospitals and health systems aligning with physicians,” said Suzy Cobin, senior vice president of PrimeCare HSA Commercial Real Estate. “You see that specifically in Chicago where all hospitals and health systems are trying to improve their patient referral base, and they’re trying to do that largely through aligning with their physicians.
“I definitely think there’s still an opportunity for some of the smaller community hospitals to be acquired by large health systems, but I’m seeing a lot of the acquisition activity really be the acquisition of physician practices,” Cobin added.
Construction gears up
Many healthcare organizations have gained efficiencies through revenue cycle management and other measures to enhance their capital positions. Many of those strategies have run their course, and hospitals and healthcare systems are now focusing on their real estate strategy and management models, and a more efficient, cost-effective outpatient model to help lower the cost of delivering patient care.
“Throughout last year, hospitals and systems went through the process of developing real estate strategies to help position themselves for the future,” said Shawn Janus, a managing director who specializes in healthcare development. “This should translate into new real estate projects on the development front. RFP/RFQ activity has been increasing and we see this as a growing trend in 2013.”
Hospitals and healthcare systems continue to evolve and respond to the changing landscape — whether it be driven by reimbursement changes, demographic shifts, increased demand or other factors. Combined, these factors have influenced organizations to expand their presence within the local community and to capture greater patient share.
“Growth in the outpatient arena and the commensurate need for new development projects will continue to be a major story in the foreseeable future,” Janus said. “From the perspective of a third-party developer, the greatest concern is whether hospitals will elect to self-develop their project. The hospital is often the developer’s biggest competitor – will the hospital invest its capital and develop the project, or will they utilize a third party developer and access an alternative source of capital?”
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