Six Healthcare Real Estate Trends to Watch in 2013

Market will see more medical office buildings designed for higher-acuity care, new uses for freestanding EDs, and more repurposing, partnerships and monetizations, according to Duke Realty.

(Indianapolis, Ind. – Jan. 24, 2013) The healthcare industry and healthcare real estate have changed dramatically in the past several years. Healthcare reform, the recession, lower reimbursements and other issues should continue to drive changes, including new uses of medical office space; creative, new partnerships; and an increase in monetizations of outpatient facilities, according to Duke Realty.

Hospitals and health systems should see the following trends in the years ahead:

Higher-acuity care will increasingly move to medical office buildings (MOBs). The 2010 Patient Protection & Affordable Care Act requires hospitals to invest in and implement many costly new systems and procedures. Hospitals also face a continued downward pressure on both Medicare payments and private insurance, all of which is forcing them to look for possible ways to cut costs. MOBs offering higher-acuity care and/or non-acute care are an attractive solution because they cost less to build, operate and maintain than hospitals and inpatient facilities, for both physical and regulatory reasons. North Fulton Hospital’s new North Fulton Medical Plaza is a good example of an MOB that provides higher-acuity care. Also, outpatient facilities in suburban areas can be a good marketing strategy, enabling health systems to improve consumer access to healthcare, differentiate themselves from the competition, increase or defend their market share, grow revenues, and allow for referrals to the main hospital. Real estate implications: These outpatient facilities will need to be designed to a higher, more sophisticated standard than typical MOBs. There also might be opportunities to repurpose vacated hospital space as services move to MOBs.

Freestanding emergency departments (FEDs) will be used in new ways. FEDs have been primarily owned and operated by hospitals, and were often the first facility built on a site that would ultimately grow into a larger campus through the subsequent addition of MOBs and perhaps an acute care hospital. But now, mainstream providers are partnering on FEDs with specialized, for-profit ED operators. Baylor Health System, for example, recently announced that it’s partnering with Emerus to build eight FEDs. In addition, for-profit companies are building stand-alone FEDs as an end unto themselves, at targeted high-traffic, retail-oriented sites. “More and more, we’re seeing for-profit ED companies competing for the 7/11, Walgreen’s and McDonald’s sites,” says Don Dunbar, Executive Vice President of Duke Realty. Real estate implications: FEDs are still a hot product type, but not necessarily a first step toward a future hospital campus as they often have been in the past.

Partnering will increase. In addition to FED partnerships, hospitals, health systems and physician groups are increasingly willing to partner with both for-profit and not-for-profit companies specializing in operating a wide range of other healthcare facilities. MD Anderson, for example, is extending its brand across the nation by partnering with local providers on cancer treatment centers. Community Health Network is partnering with Centerre Healthcare to build rehab hospitals. Mayo Clinic is partnering with hospitals and health systems on a wide variety of projects nationwide. The bottom line is that hospitals can benefit from these partnerships by quickly broadening their range of services, improving the quality of care by adding specialties and, in some cases, providing a continuum of care, while leveraging strong, established brands. The brand-name companies also profit from the relationships and have the opportunity to extend their brands into new markets. Real estate implications: New, expanded or renovated “branded” facilities might be needed to accommodate these partnerships.

The case for hospital-driven monetizations will keep getting stronger. Last year will probably end up as a near-record year for MOB sales, but the primary sellers were commercial real estate developers, not hospitals and health systems. For several years, industry experts have expected an increase in hospital-driven monetizations of MOBs and other non-core assets, but that hasn’t materialized. However, according to Duke Realty, this could be the year. There continues to be tremendous investor demand for MOBs and plenty of capital is available. Prices remain near all-time highs and cap rates remain historically low. But what’s different in 2013 is that most of the uncertainty about healthcare reform has been laid to rest with the U.S. Supreme Court upholding the constitutionality of the law and the reelection of President Barack Obama. But health providers also face major expenses for accountable care organization (ACOs) and electronic medical record (EMR) systems and other requirements, and the prospect of reduced reimbursements. So the capital that would be unlocked from monetizations might prove much more tempting than in the past. Plus the money generated from monetizations can help fund hospital mergers and acquisitions, which are continuing as the healthcare industry consolidates. Real estate implications: More MOBs might be coming on the market.

Repurposing will expand. Repurposing, or adaptive reuse, of other types of buildings – such as offices, retail, industrial space and even movie theaters – for medical use will become an even more prevalent healthcare and real estate strategy. Repurposing enables health systems to more quickly and cost-effectively go to market than if they were to build a new facility. While there might be a dwindling number of vacant Circuit City, Borders and Linens ‘n’ Things stores in the suburbs, there will continue to be other suburban opportunities as chains like Best Buy and even Macy’s downsize. In addition, healthcare reform will force providers to enter into other markets, especially central cities. Kaiser Permanente, Dignity Health and Scripps Health are three examples of health systems that repurpose space for medical use. “Many are jumping on old grocery stores,” says Mr. Dunbar of Duke Realty. Real estate implications: There’s still plenty of potential new life for former retail and office buildings.

Compliance will become even more vital. While Stark and the Anti-Kickback Statute (AKS) have been on the books for more than two decades, they’ve become more stringent because of health reform and other legislation that passed in 2010, and they’re being enforced more strictly than ever. Health providers are now required to self report to the Centers for Medicare & Medicaid Services (CMS) any violations of these laws in a wide variety of areas. Failure to self report can result in significant penalties, including repayment of disqualified claims, fines and possibly prison under the AKS laws. In the worst cases, providers could face disqualification from receiving Medicare and Medicaid reimbursements. “The reality for many hospitals and health systems is that it’s expensive and time-consuming to stay on top of industry regulations and laws and the documentation requirements,” says Deeni Taylor, Executive Vice President of Duke Realty. “Plus many providers lack the internal expertise needed to deal with real estate matters.” Real estate implications: More and more health providers may decide to minimize their compliance risk by monetizing their MOBs.

About Duke Realty

With more than 22 years in the industry, Duke Realty’s healthcare team offers proven experience in providing hospitals and physician groups comprehensive planning, development, ownership and facility management services. Projects have ranged from small medical office buildings to large ambulatory care centers with diagnostics, oncology and surgery services. To find out more, please visit www.dukerealty.com/healthcare.

Duke Realty owns and operates approximately 142 million rentable square feet of industrial and office assets, including medical office, in 18 major U.S. cities. The medical office portfolio includes 70 existing properties totaling 5.4 million square feet, plus nine buildings totaling 873,000 square feet in the development pipeline. Duke Realty Corporation is publicly traded on the NYSE under the symbol DRE and is listed on the S&P MidCap 400 Index. More information about Duke Realty is available at www.dukerealty.com.

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