While the massive, monolithic hospital isn't a relic of the past, real estate investors don't see it as the wave of the future, either. Not when emerging payment models favor outpatient over inpatient care, they say.
A lot has changed in the five years since Wall Street took a dive and dragged commercial real estate down with it: Obama got elected president and subsequently passed the Affordable Care Act, essentially designing a new healthcare model focused on post-acute care rather than costly acute care. So when investors finally emerged ready to finance new healthcare construction, they shifted their attention to smaller projects outside the main hospital campus. Both new construction and existing building renovations are focusing predominantly on physician clinics, outpatient therapies, rehabilitation and long-term care services.
Greg Warsek, senior vice president of Associated Bank's Commercial Real Estate division in Chicago, says the lion's share of investment dollars are being funneled toward outpatient projects.
"The clear trend is with medical offices," he said. "As the market started to pick up in the last 12 to 18 months, our office developers are seeing medical practices going into existing commercial locations. We're seeing a lot of creatively re-used buildings you wouldn't expect to go medical."
Commercial real estate has rebounded strongly from its sharp fall in 2008. In Associated Bank's case, fortunes started to turn around in 2010, as it did $200 million in business. It grew exponentially from there, producing $1 billion in 2011 and $1.5 billion in 2012. Warsek expects 2013 to reach $1.8 billion.
Much of that growth has been driven by outpatient projects, which he says weathered the economic downturn well.
"Financing is readily available for this product type because they didn't experience any losses during the recession, tenants didn't move and people still needed medical care," Warsek said. "There is a strong appetite for these buildings."
While development has shifted toward the outpatient sector, there is a moratorium on hospital building, says Karen Anillo, senior vice president and team leader for Associated's Healthcare Industry Banking Group.
"As we go forward, reimbursement is being based more on quality than volume, so providers must demonstrate they can provide quality care at lower cost," she said. "That takes the services outside the hospital, which is left with high acuity patients while the rest seek treatment elsewhere."
This new reality should have hospital CFOs thinking differently about what their real estate assets and physical infrastructure should look like, Anillo said.
"They will have to look at their primary service market and determine how to take on new patients, what they can do to maximize revenue at that hospital and that will lead to forming accountable care organizations," she said. "They also need to realize that there are now competing interests for capital, so they need to figure out what project will get them most bang for their buck."
Less 'hospital-centric'
To be sure, the days of hospital-centric care are coming to a close, real estate financiers say. Chicago-based HSA PrimeCare is actively working on several medical complexes devoted mainly to physician practices. Recent portfolio additions include a $10 million, 15,000-square-foot surgical center for Hawthorn Associates in Vernon Hills, Ill., currently under construction; and an 86,125-square-foot medical office building in Ypsilanti, Mich., purchased for $14.8 million from Michigan Orthopedic Center Properties.
PrimeCare's president John Wilson maintains that the firm's investment and development strategy is solidly fixed on outpatient facilities.
"To compete in this field efficiently, hospitals are changing from being 'hospital-centric' to full service healthcare providers," he said. "The scope of their services is expanding and they have to do all of this at a lesser cost. Understanding the healthcare delivery model is more important than the real estate itself."
A phrase in common use these days is "physician alignment," which is driving the real estate market, adds Suzy Cobin, senior vice president of PrimeCare.
"In Chicago, large healthcare systems are purchasing physician practices," she said. "Northwestern, North Shore and Advocate are all doing that."
Another popular term is "monetization," in relation to the increasing pressure hospitals are under to care for more patients with less, Cobin said.
For instance, PrimeCare's Ypsilanti arrangement is structured so that capital can be pulled out of the facility. Hospitals with a balance sheet of more than 50 percent real estate could free up non-core assets by selling or monetizing, Wilson said.
Leasing unused parts of the hospital campus can also bring returns, though Wilson says every property is different.
"They all have a board and different objectives, demographics and geographies, so there are many variables," he said.
Real estate financiers need to keep their fingers on the pulse of the industry and PrimeCare leaders are continuing with their due diligence to learn more about what the industry needs, Wilson said.
"We're currently on a listening tour that will end up with 20 healthcare executives talking about what the ACO model means, how it has evolved and what it will look like," he said. "It keeps you on your toes because it ever changing."