What Healthcare Reform Did
Demand for medical services is strong, but providers aren’t rushing to build. Yesterday at our first-ever Baltimore Healthcare Real Estate Summit, experts said healthcare reform’s mandate for electronic records is eating up capital that might otherwise be spent on real estate. (Sheesh, leave some capital for the rest of the table.)
Johns Hopkins Medical Management Corp president Gill Wylie says converting to all-electronic medical records costs “hundreds of millions.” As a result, real estate acquisition and development decisions are getting pushed down the priority list. What won’t change is his hospital leasing lots of space around Baltimore: consolidation means more doctors (encompassing many specializations) are joining hospital systems, and those folks need to practice somewhere. (Unless they want to practice medicine in a van, like a medical food truck.) He thinks healthcare providers will integrate, so look for more partnerships between hospitals, a la Hopkins’ JV with Anne Arundel Health System in Odenton.
HPRG principal Chuck Feitel says uncertainty over healthcare reform’s impact means tenants are focused on short-term deals. They also want cheap rental rates and robust TI packages, which means leases are taking longer to get signed. To save money, many practices are moving to off-campus medical office buildings, which he labels a short-term fix. Future-focused doctors still dream of owning their own real estate, but it’s hard find a developer willing to do medical office condos. The good news: the market will stabilize once new healthcare regulations get sorted out. And that’s why Chuck says the sector’s future is rosy.
Foulger-Pratt Rockledge Medical Properties prez Michael Abrams (right, with moderator Jim Kornick of NorthMarq) says smaller tenants are consolidating to form larger groups affiliated with hospitals, which gives developers an opportunity to forge stronger relationships with those hospitals. And well-performing assets are fetching premium prices in the investment sales market: Best in class properties routinely achieve cap rates in the low- to mid-6% range, and the Class-A market is dominated by national institutional players. In situations where new development makes sense, he says opportunities lie in off-campus buildings (the cost of care rises dramatically when you’re on a hospital campus).
Washington Real Estate Investment Trust’s Stephen Carboni says healthcare is more similar to retail than office: landlords need lots of communication with tenants, and it’s important to learn the personality of each doctor. (Are they more of a Dr. House or a Dr. Quinn, Medicine Woman… or maybe a Doogie Howser?) And just like new retail projects, he says new medical office buildings need to be “where the density is”—in transit-oriented, mixed-use properties. Leasing space is the best option for most practices, he says, because buying a medical office condo limits growth potential. As for all those consolidations we keep talking about, he says his portfolio has benefited. Why? Increased creditworthiness and reduced risk.