Healthcare real estate should be considered as a component of the investment strategy for those focusing on the long term. The medical office building (MOB) market size has recently been estimated in the $500 billion to $1 trillion range. At least 60% of this inventory is 20 or more years old. This real estate varies in quality, with some buildings up to current standards, others serviceable with allowances for retrofitting and upgrades and a portion approaching obsolescence.
Healthcare systems continue to consolidate to form larger, more economical organizations. One strategy utilized by many larger systems is to sell their real estate and lease it back or reposition their facilities to provide greater efficiencies and system-wide flexibility. These transactions free up capital and allow greater focus on the core mission of caring for patients.
Some systems and physician groups are choosing independence over affiliation with larger healthcare organizations. These groups have incentives to lease space rather than commit their resources to real estate. High rates of renewal – 80% to 85% – indicate a reluctance to relocate due to deep ties to a community and specific locations. For Flagship REIT, these strategies provide attractive investment opportunities.
The greatest driver of healthcare demand is the aging of the American populace. This is a catalyst for the steady expansion of the population that uses the most healthcare and receives universal coverage through Medicare. People over the age of 65 experience three times more hospital days than the general public, while those over 75 have four times more days, according to the U.S. Centers for Disease Control. From 2010 to 2050, this strategic population for the healthcare industry will more than double – increasing by nearly 50 million, according to the U.S. Department of Health and Human Services.
The Southeast’s population is growing 5% more quickly than that of the U.S. as a whole. New residents relocate to the region due to the area’s mild climate, growing economic opportunities and quality of life.
The South remains at the forefront of a population shift that has produced a growth of 10 million people since 2010 and shows no sign of abating. In 2018 alone, movement into the region numbered about 1.2 million people, with movement out amounting to 714,000 for a net gain of 512,000 residents. Including migration from abroad, the net in-migration into the South resulted in a gain of around 959,000 people.
Nationally, just 20% of major metropolitan areas have exhibited positive gains in senior migration. As shown on the map, these net gainers in seniors are heavily represented in Flagship REIT’s primary market, the Southeastern and Southern Mid-Atlantic regions. These regions’ 55+ population increase outstrips the national average in major markets such as Charlotte, Orlando and Nashville as well as in secondary and tertiary markets. This massive influx of senior residents is one driver of the trend toward brick and mortar outpatient healthcare real estate.
Health systems are shifting care from their inpatient environments to outpatient settings, such as medical office buildings. Inpatient reimbursements from payors are declining, and occupancy costs to deliver care in outpatient facilities are far lower than those in hospitals. Construction costs for such facilities are typically lower in the Southeastern and Southern Mid-Atlantic U.S. than in other regions.
For these reasons, one can expect the demand for outpatient healthcare real estate space in the Southeastern and Southern Mid-Atlantic regions to continue growing.
A shift toward outpatient care continues to be a strong, enduring trend. Large healthcare providers want to treat patients off main campuses due to the lower facility and treatment costs, better outcomes and increased patient satisfaction. Patients prefer the convenience and accessibility of outpatient care.
Despite the arrival of telemedicine and the digitalization of some medical services, there is no large-scale alternative to face-to-face, clinician-to-patient interaction. This is especially true for most specialist and referral-based healthcare needs, such as orthopedists, allergists, eye doctors, dentists and other medical specialties. Rather than being seen virtually, patients still prefer brick-and-mortar locations and an in-person relationship with a trusted physician.
Flagship Healthcare Properties (Flagship) serves as external manager of Flagship REIT. Flagship shares the same commitment to and focus on outpatient healthcare real estate and provides a comprehensive suite of services. Our involvement in outpatient healthcare real estate and tenant experience goes much deeper than simple capital allocation and the initial decision to invest.
While capital allocation is a critically important function which Flagship performs skillfully, Flagship’s biggest differentiator is our vertically-integrated platform of more than 70 professionals who provide hands-on property and asset management, leasing, ground-up development and engineering services to our portfolio of properties (both those in the REIT and those owned by third-parties). This provides a competitive advantage for both clients and investors.
Managing over 4 million square feet across 165+ properties provides unparalleled industry knowledge, greater operating performance, an increased pipeline of off-market investment opportunities, and more strategic relationships with healthcare providers in the regions in which we operate. This translates into greater performance, including increased tenant satisfaction and retention, which is demonstrated by our 95% occupancy level and lease renewal rates approaching 80%.