Medical Office Buildings – 2015 Outlook
Commercial Real Estate
With the implementation of the Affordable Care Act and the demographic reality of an aging population, the demand for health care services continues to increase. As might be expected, then, the real estate investing market for medical office buildings has been quite healthy recently. Operators of such properties have sought to increase the size and amount of their holdings as medical providers themselves expand to meet consumers' health care demands.
According to Revista, an Annapolis-based data service focused on medical real estate, prices for medical office buildings increased approximately 7.5% in 2014, as reported by National Real Estate Investor. A significant amount of the properties in this sector are owned by hospitals, health systems, and providers, so opportunities for outside investors in this space can be somewhat limited.
Because Medicare and Medicaid reimbursements are no longer based on fees but rather on medical outcomes, hospital systems are scrambling to become more efficient and effective. Mergers of independent and smaller hospital systems have been one result. Another effect has been for systems to open more clinics in the suburbs and to make those clinics more multidisciplinary, according to a report from Jones Lang LaSalle.
Revista expects that transaction levels for medical real estate will remain near record highs. Revista cites strong valuations (which provide an incentive for investors to buy and sell properties) and availability of capital as key drivers of this trend.
Changing reimbursement rates under the Affordable Care Act are driving more physicians to be employed by hospital systems, which in turn leverage shared support spaces. The expected increase in numbers of patients is expected to result in increased demand for exam room space. Layouts of medical office buildings have also been changing recently to accommodate “consultation” or other flexible spaces rooms for patient visits that don’t require a physical examination.
The market for outpatient care centers, including emergency and other services, has also grown steadily in recent years, as less invasive procedures have decreased the need for lengthy hospital stays. Revista predicts that outpatient services will remain an area of focus for new medical office building development. This subsector expanded an average of 3.6 percent between 2009 and 2014.
Other observers also note that many hospitals have put a renewed emphasis on outpatient services. The typical hospital profit base 10 years ago was about 65% inpatient and 35% outpatient. “Today, that’s flipped,” said Brian Silverstein, M.D., vice president of Chicago-based research and consulting firm Sg2. Outpatient facilities can range from a freestanding facility in the suburbs to a hospital-based center on a downtown campus.
Health care providers will also likely increasingly choose to open locations that offer convenient locations for patients. In comments made in a Duke Realty-sponsored webinar about “The Patient-Centered Ambulatory Facility,” developers and renovators of medical office buildings are responding to patients’ desire for convenience, specifically for closer-to-home facilities and less waiting time for services.
“Taking a more strategic approach to fully analyzing the viability and impact of existing outpatient facilities and medical office buildings has become critical to healthcare systems,” noted the Jones Lang LaSalle report. “A number of systems saw big benefits from taking real estate decisions out of the hands of local hospitals so that they could be made for the benefit of the system as a whole.” Increasingly, the healthcare system’s headquarters guides and executes major real estate and facilities decisions to take advantage of system efficiencies in transactions, management, planning, and facility development.
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