Over the last 15 years, the U.S. healthcare industry has purposefully shifted care away from the inpatient environment – the hospital bed – to more cost effective, efficient and convenient outpatient settings. Advancements and innovations in medical procedures, technology and pharmacology have driven an increasing shift of more complex cases into ambulatory surgery centers (ASC), outpatient cancer clinics, digital imaging centers, rehab facilities and medical office buildings (MOB).
Healthcare real estate is also benefiting from two firmly rooted trends. “Small ball” real estate has become a solid growth segment. These facilities can range from 3,500 to 40,000 square feet, depending on tenant needs and strategies. Smaller buildings, similar to retail outparcels, are suitable for urgent care centers, primary care clinics and renal dialysis facilities. Larger buildings support complementary tenancy, i.e., ambulatory surgery, digital imaging, exam rooms and pre-op and recovery rooms. “Destination outpatient” centers are significant nodes within a health system. These are larger – upwards of 200,000 sf – and include multidisciplinary tenants offering a full range of services to support care coordination – emergency department, primary and specialty care, diagnostic imaging, lab, pharmacy, ambulatory surgery, outpatient rehab/physical therapy – allowing patients to move from suite to suite rather than driving to another location.
Reimbursement structures are evolving, from a volume-based model to value-based care. Medicare, Medicaid and private insurers are encouraging multidisciplinary care coordination, a focus on wellness, and measured outcomes with incentive payments for better care at lower cost¹ – taming the cost trajectory by “bending the curve.”² Consumers are paying for a greater share of their healthcare costs and demanding more convenience. The health system infrastructure is evolving to more cost-effective and convenient sites of care, many of them away from hospital campuses. Each facility becomes an important node in an integrated network of inpatient and outpatient care.
Healthcare is a significant growth engine. It is now the largest employer in the U.S., representing 13.4% of all jobs.³ Healthcare employment is projected to grow 14% from 2018 to 2028, much faster than the average for all occupations, adding about 1.9 million new jobs.4 National healthcare spending is projected to grow 62% from $3.5 trillion in 2017 to nearly $5.7 trillion in 2026.5
A Baby Boomer, born between 1946 and 1964, turns 65 every eight seconds, over 10,000 daily.6 In 2018, there were 52 million people age 65 and older. By 2034, there will be 77 million.7 The aging population has a direct effect on the demand for healthcare services as doctor visits and medical expenses increase with age. People over age 65 spend five times more on healthcare than Millennials. Incidentally, that younger cohort is now forming families and moving away from urban environments, thereby serving as a driver for MOB growth in suburban markets.8
At the onset of the COVID pandemic, healthcare providers were urged to suspend elective procedures, dramatically reducing patient volumes. For four months ending June 30, 2020, hospitals will incur an estimated $200 billion in losses.9 And yet, analysts are confident the crisis will be followed by a wave of patient services due to pent up demand during the COVID lockdown.10 A Johns Hopkins study suggested it will take seven to sixteen months for surgeons to complete the backlog of suspended surgeries.11 Physicians are requiring six-and seven-day operating schedules from their landlords and 12-hour shifts from their staff to catch up.
Looking forward, building designs for existing and future MOBs will accommodate enhanced air filtration systems, social distancing protocols, touchless technology and other features to diminish the spread of germs and enhance safety. Flexibility across sites of care will require redefining the boundaries of traditional care settings. Facilities will need to dynamically scale capacity up or down to respond to changing needs.12
Despite economic volatility and ongoing regulatory changes, healthcare real estate continues to remain a stable property type. Its fundamentals are cyclical-resistant, offering consistent and positive income growth and stable occupancy compared to other property sectors. Case in point: While telemedicine has grown dramatically in a very short time during the COVID pandemic and will likely remain relevant in the future, analysts and industry experts are confident telemedicine will not decrease overall medical office space demand. In fact, it may have the opposite effect, serving as a complementary gateway to more in-person care. Most physicians and patients want a physical touch point.13
Hospital and physician practice consolidations and mergers have been a consistent trend for years as providers seek economies of scale. These transactions are resulting in examinations of their real estate portfolios. Hospitals have encountered liquidity challenges during the COVID-19 pandemic and are placing a higher premium on their capital, driving some to monetize non-core assets to raise cash and avoid triggering debt covenants and penalties. In a recent McKinsey & Company survey of health system CFOs, 24% indicated they have less than 90 days cash on hand and 32% expect the financial impact of COVID-19 to deepen by the end of the year.14
The future for outpatient real estate is extremely positive as the shift in services from inpatient to outpatient environments continues and the healthcare industry exhibits solid future growth. As lower-cost venues, MOBs meet the challenges of the insurance industry pressing for lower reimbursements. They satisfy the demands of consumerism and patient satisfaction by offering accessibility, visibility and convenience. Healthcare providers benefit from lower occupancy costs and the ability to dot the landscape with off-campus facilities to protect and grow market share. With complementary tenancy, MOBs facilitate care coordination, encourage more efficient utilization of services and improve the patient experience. For the foreseeable future, outpatient facilities will benefit from these very positive trends in healthcare.
2 “What Is Bending the Cost Curve? An Exploration of Possible Drivers and Unintended Consequences,” Kimberlyn McGrail, PhD, MPH and Meghan Ahuja, MPH
3 JLL Research
4 Bureau of Labor Statistics
5 Centers for Medicare and Medicaid Services (CMS)
9 American Hospital Association
11 Johns Hopkins Medicine
12 “From Wartime to Peacetime: Five stages for healthcare institutions in the battle against COVID-19,” McKinsey & Company, April 24, 2020
14 McKinsey & Company’s Health System Financial Resiliency Survey, May 2020