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Evolving Landscape of Medical Real Estate

Posted: April 4th, 2010 | Author: | Filed under: Uncategorized | No Comments »

For better or worse, the implications of the massive Healthcare Bill are slowly being understood; however little certainty has yet to be seen. For commercial real estate owners and investors however one thing is for certain – medical real estate’s core supply and demand fundamentals will be shocked.

Surely, adding 32 million Americans to the ranks of the insuranced, coupled with the emergence of the largest aging cohort this country has ever seen, will undoubtedly add significant demand for healthcare. Experts estimate nearly 60 million square feet of new medical real estate is needed alone due to the new legislation (standard industry metric of 1.90 square feet for each new patient brought into the system.) But who really stands to capture all this growth? Due to the design of the Bill, much of this demand will likely be captured by hospital institutions rather than private investment, private physicians and/or doctor owned practice facilities.

Private physicians are left concerned with reimbursement rates. Through the medium and long term, doctors will see declining government reimbursements for certain procedures. This may affect some, such as family physicians who may need to see upwards of 50% more patients in order to maintain the same income level. Shrinking profits could make it difficult for doctors who don’t belong to a hospital group to afford occupancy costs, which could negatively impact occupancy and rents for outlying areas.

Additionally, the Bill places limits on any new or expanded Physician-Owned Hospitals; the Senate version of the Bill (if approved) effectively halts ANY expansion or new construction altogether, by denying them Medicare reimbursements. The ban would start on Aug. 1 or Dec. 31 if the Senate approves “fixes” in the reconciliation bill. Also, new Medicare taxes on investment income and capital gains, including rental income, will financially pressure landlords, doctors and other high-income earners.

Hospitals, with an eye towards greater efficiency, will likely respond by expanding on-campus facilities as well as establishing smaller satellite offices for outpatient facilities, ambulatory care, and medical office – the whole intent will be keeping patients out of costly inpatient beds. Because of rising costs and declining revenues, many doctors not connected with physician groups or hospitals may have to join up with practices owned by hospital systems and become tenants of their on or off-site campuses. As those investment grade properties fill up with good-credit long-term tenants, there will be a greater opportunity for institutional investors to invest; therefore, allowing hospitals to raise the liquidity they need through private Joint Ventures, Dispositions and Sale Lease Back transactions.

In today’s environment it’s critical for private physicians to think strategically about these issues and plan accordingly. Make certain you are comfortable with how the legislation will impact your business. If appropriate, consider the benefits of securing a competitive advantage by locking in today’s cheap real estate costs for the future. Attractive financing, low lease rates, and lower building prices currently exist and maybe the key for a healthy business in the future.

Source: CoStar News (Medical developers, hospitals early winners as healthcare overhaul becomes law.)