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Sunday, 15 September 2013 22:00

Real Estate Rx: Health care reforms drive opportunity for real estate investors

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As health care reforms continue to change how the industry operates, many health systems are also taking a fresh look at how they manage their facilities.

During that re-evaluation process, health systems are increasingly asking the question: Do we need to tie up our capital in buildings and infrastructure or can it be put to better use in other areas of our operations?

The answer, at least as evidenced by recent activity in the West Michigan health care market, is that systems seem to be opting for sale-leaseback agreements rather than remaining as property owners — and they’re finding willing investors interested in doing deals.

“The (health care) market is aggressive right now,” said Anthony Pecchio, vice president of health care services for Christman Co. “There are a few trends converging to create a perfect storm in the sector. It’s definitely something we’re tracking.”

Most health systems these days are more concerned with consolidating, merging or buying other health systems, Pecchio said.

Health care organizations need to achieve a certain scale to operate efficiently in today’s health care environment. At the same time, many are looking for capital to reinvest in their caregiving operations and see divesting of their real estate, particularly medical office buildings, as a way to put money in the bank. Being a property owner or their own landlord is not core to their patient-centered missions.

The trend in health care has created an opportunity for third-party developers to develop facilities and lease them out or to take existing non-core facilities such as medical office buildings (MOBs) and outpatient facilities off health systems’ hands, Pecchio said.

In particular, New York City-based American Realty Capital Healthcare Trust Inc., a real estate investment trust formed to invest primarily in quality medical office buildings and health care-related facilities, has been active in the local market over the last year.

The REIT, which floated a $1.5 billion initial public offering in 2011 to invest in health care infrastructure, continues to add properties to its portfolio in the sector, the most recent of which in Michigan was the Spectrum Health West Pavillion at 6105 Wilson Avenue.

The building, which was built and owned by Christman Co., is a two-story, 52,000-square-foot facility designed as a prototype for Spectrum that’s set up in the manner of a hub-and-spoke-inspired services delivery environment, said Joe Hooker, development services manager for the contractor.

The REIT paid $16.4 million for facility, and the deal closed in seven weeks, Hooker said.

In January, MiBiz reported that American Realty acquired the Cancer Center at Metro Health Village for $6.2 million, part of a larger $214 million deal for 14 medical facilities in nine states. Additionally, Great Lakes Medical Properties LLC sold the LakeView Outpatient Center in Paw Paw to American Realty for $30.4 million in September 2012. The facility is fully leased to Bronson Healthcare Group.

Shifting landscape

Health care mergers and acquisitions should also lead to stronger, less-risky tenants in the medical office sector, which should counter the “headwinds” of a smaller tenant pool, according to a recent report from California-based real estate and investment services firm Marcus & Millichap.

Another factor at play for medical facilities is a shift away from traditional in-patient care to more ambulatory care, Pecchio said. Health systems are looking to decentralize their campuses, make available some outpatient services at off-site locations and bring those services into more communities around the state, he said.

Health care organizations are also going to need to re-evaluate their real estate needs to accommodate the millions of new Americans who could be covered under the expansion of Medicaid, which is determined on a state-by-state basis.

The Marcus & Millichap report estimates that within the next 10 years, health care reform could bring coverage to roughly 27 million to 30 million uninsured people across the country, depending on state participation in Medicaid expansion.

Medicaid expansion in Michigan will add to the system as many as 470,000 new patients who otherwise lack health insurance, heightening the need for primary care physicians to handle greater patient loads.

On top of Medicaid expansion, requests for health care from an aging Baby Boomer generation are anticipated to climb in coming years. Nationally over the next decade, the over-65 age group will grow by approximately 18 million individuals, accounting for 18 percent of the nation’s population by 2023, the Marcus & Millichap report states. This age group currently makes up 13 percent of the U.S. population and already accounts for more than one-third of the health care expenditures nationwide, according to the report.

Older population drives demand

Across Kent, Ottawa, Muskegon and Allegan counties, the percentage of adults over age 65 has been relatively steady over the last two decades but has begun to increase slightly in the last five years, according to Grand Valley State University’s 2013 Health Check report analyzing health care trends in West Michigan. The net result: There are more people over age 65 in the region and “therefore higher age-related health care costs.”

The report shows the population in the four-county region is getting older. Across the counties, the over-65 age group, now about 14 percent of the population, surpassed the 35-44 age group in 2009. That compares to 1999 when the over-65 group was about 12 percent of the population and the 35-44 age group was about 16 percent.

The 45-64 age group is now about 27 percent of the four-county population. It was about 22 percent in 2000 and about 17 percent in 1990.

“Long-term population and age distribution changes can have significant effects on health care,” the report stated. “Typically, older populations have different and more extensive health care needs than younger populations. Additionally, changes in the population distribution can change the need for health care service in particular localities.”

According to an article by Duke Realty executives Don Dunbar and Jason Sturman in the July/August edition of Healthcare Finance News, health systems will need more MOBs to accommodate the aging population, “which consumes three times the medical services of younger people.”

“MOBs also are growing in popularity with providers, particularly in those off-campus locations, because they are less expensive to operate than inpatient facilities and they enable providers to be more competitive, providing improved, convenient consumer access to health care and growing their market share,” Dunbar and Sturman wrote in the report. “Consumers are flocking to MOBs in their neighborhoods because there’s no need for a long commute or the need to navigate a large medical center campus in an unfamiliar community, which is stressful for patients.”

Coupled with these demographic shifts is a change in the way health systems are evaluated, subsidized and compensated. Instead of the fee-for-service model, the industry is moving to a more performance-based system that has an increasing focus on wellness and preventative care. Patient satisfaction and low readmission rates also carry more weight in how hospitals are compensated going forward.  

All the changes have health systems re-evaluating their facility needs, a move that’s creating opportunities for new property and development deals to emerge.

“This market has a long tailwind on it, and the trend isn’t just local — it’s statewide,” said Pecchio of Christman Co. “The only volatility is on the regulatory side. The market would be even hotter if not for some continued uncertainty.”

Buyers hunt for deals

With all the uncertainty surrounding the implementation of Obamacare, some real estate professionals are hedging their investments, but REITs and developers still see the health care segment as “the darling” of the real estate market, said Tom DeBoer, principal with Colliers International in Grand Rapids.

“(Investors) are buying anything and everything if it makes sense,” he said. “Right now, it’s getting hard to find properties because so many people are chasing it, and I don’t see that slacking off anytime soon.”

In the last 12 to 18 months, DeBoer said his office received a significant increase in phone calls from outside investors seeking fully leased medical office properties.

While the capitalization rate for health care facilities has dipped a few points nationally — current deals are running between 6 percent and 7 percent — DeBoer said traditional office space still can’t compete with projects such as medical office buildings. Investors are paying top dollar for long-term, triple net leased health care facilities, he said.

Some new medical offices and individual specialized practice offices could also hit the market sooner rather than later, DeBoer said. That’s because banks are willing to finance new medical facilities, even for young doctors interested in private practice who’ve just completed their residencies, according to one banker DeBoer spoke with recently.

The risk profile is favorable, and the banks believe in the long-term opportunities in the health care market, DeBoer said.

“There are changes coming still in the medical field and medical is still the darling of office sector,” he said. “If you can find a building, it’s a real decision for investors to make.”

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Editor’s note: This story has been changed from its original format. An earlier version incorrectly identified the owner of the LakeView Outpatient Center in Paw Paw. 

Read 3298 times Last modified on Wednesday, 18 September 2013 16:56

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