Healthcare is one of the most steadily growing and predictable sectors of the economy, and healthcare real estate is attracting high levels of interest from investors of all types – from local private capital to massive healthcare REITs and everything in between. Here’s a look at why medical office properties are rewarding active investors and attracting an abundance of new ones.
Only a few years ago, many surgical procedures required long-acting anesthesia, major incisions and lengthy recovery times in an inpatient setting – at a high cost to the hospital, physician and the patient. Now, many surgical procedures can be done in more cost-effective, outpatient ambulatory surgery centers (ASCs). With demand for ASCs on the rise, the demand for medical office buildings (MOBs) follows. Physicians are becoming less physically tied to hospitals and want to be located as close as possible to the surgery center. The Ambulatory Surgery Center Association has stated that, “Given the history of their involvement in making ASCs a reality, it is not surprising that physicians continue to have at least some ownership in virtually all (90 percent) [of] ASCs.”
As policy makers catch up with technology and implement improved payment and coverage for outpatient procedures, the amount of medical space absorbed by ASCs and their affiliated physicians will accelerate.
Practitioners gain by teaming up
The combined forces of the Affordable Care Act, tightening reimbursements and the high cost of providing hospital care is causing healthcare providers to revisit how and where they deliver care to their patients. With costs rising and reimbursements generally flat, having scale is becoming increasingly important for hospitals and physicians, resulting in more industry consolidation.
Sole practitioners who have practiced on their own for several decades are teaming up, and sharing staff, equipment and real estate. The idea of young physicians opening up new practices after residency is almost unheard of these days. Physician groups, specialty care centers and other healthcare providers are partnering with or joining health systems to tap into their robust networks, achieve better reimbursement rates and further reduce overhead. Finally, only at the tip of the iceberg is the trend of hospitals and health systems merging or partnering to gain regional or national scale and improved resources.
While there is no net gain in occupied medical space from the pure consolidation, the antiquated and often obsolete MOBs are being scraped for hospital expansion, new outpatient services or more functional medical office space. The beneficiaries are the owners and developers of buildings that meet the new standard: accessibility, larger floor plates and a better care environment.
The dramatic impact of the Baby Boomers
Consolidation of healthcare providers and advancements in technology would have very little impact on the demand for medical office space without the dramatic growth of our elderly population. In 1946, following World War II, 3.4 million infants were born in our country, a 22 percent increase from the prior year. The surge continued for more than two decades, and by 1964, 78 million “baby boomers” joined the U.S. population. The eldest group of this 22-year generation just started turning 65 in 2011, beginning an upward curve in demand for healthcare services and the facilities that house them.
Also fueling the percentage of the U.S. population age 65 and older is the lengthening of our average lifespan that has resulted from the evolution of medicine. With the average elderly individual’s annual healthcare expense being more than triple that of the average working-age individual (ages 19 to 64), the growth trajectory and evolution of our country’s healthcare is only in their infancy stages.
So, what does this mean for the investor?
The outcome of these factors is record medical office sales activity and unprecedented levels of interest from the spectrum of investor profiles, particularly following the niche’s strong performance through the recent recession.
In the first half of 2015, JLL saw a 91 percent increase in national spending in healthcare real estate over the same period in 2014. The growth in the healthcare sector, in every aspect, has only just begun.
This article was previously published on JLL’s The Investor.
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