As U.S. health-care systems limit medical services to emergency and urgent care situations in the face of COVID-19, medical office buildings are standing empty, and the threat of tenants missing lease payments mounts.
Still, experts say, investors have every reason to keep MOBs high on their list of sector favorites. In addition to pent-up demand, strong sector fundamentals—aging Baby Boomers, expanded medical insurance coverage, new treatment options and shifts in service delivery—are expected to aid the MOB sector’s rebound and its love affair with investors.
“Medical office buildings and other outpatient care settings have been hot commodities in commercial real estate investment for the past several years,” according to Cushman & Wakefield’s 2020 Health Care Investor Outlook released at the end of last year. “Legacy investors are doubling down on the sector, while new investors are competing for the limited product supply.”
In the meantime, medical office building owners will have to wait for tenants and their patients to return.
“Most owners are trying to not make an impulsive decision, to wait and see how this situation plays out,” said Allen Bolden, a partner with HB Medical Real Estate.
But despite the MOB market’s underlying strength, too much time may prove to be an enemy.
“The fact that we don’t know if this will last another week or several months is why we can’t give solid answers to the future,” Bolden added. “The only thing we do know is the longer the economy is shut down, the more this will test the strength of MOBs as an investment.”
While hospitals and health-care facilities have been inundated by an influx of COVID-19 patients, many medical offices that offer non-emergency services have seen the opposite occur.
The property type’s solid fundamentals prior to the virus, however, promise a relatively rapid rebound when the economy is up and running again, according to Marcus & Millichap’s April special report on medical office buildings.
With many shelter-in-place orders in effect, communities across the U.S. are avoiding unnecessary travel and exposure, including those patients seeking elective surgeries or nonessential surgical and dental procedures. As patients decide to reschedule their appointments until further notice, many medical offices aren’t generating revenue and have had to partially, or fully, close.
The Post COVID-19 MOB Market
The COVID-19 pandemic has already left its mark on different facets of commercial real estate like office leasing, construction and retail. While the medical office building market was not spared, its strong market fundamentals prior to the emergence of the new coronavirus offer signs of a healthy market after the pandemic ends.
The national vacancy rate for medical office buildings was 90 basis points below the trailing 10-year-average of 9.7 percent, according to the report. The U.S. market also saw 6 million square feet of medical office space absorbed in 2019. Following demand, the below-average availability of medical offices has led to a steady stream of new properties, with deliveries hitting 10 million square feet. The statistics have attracted the attention of private investors looking for assets between $1 million and $10 million.
Once the COVID-19 pandemic is under control and the economy recovers, the medical office building market is expected to bounce back. The combination of an aging population, expanded medical insurance coverage and new treatment options equate to a growing demand for health care and the medical offices that come with it. Once the economy begins to return to normal, the backlog of work due to closed offices and rescheduled or canceled appointments will likely bring a sudden influx of work for medical-office staff.
And once the market returns to normalcy, the report noted that well-located assets with the infrastructure to handle modern medical needs will be in high demand. Specifically, medical office building demand may grow in non-urban markets as younger Millennials begin to move away from urban centers.
The medical office market appears to be a clear winner in a U.S. commercial real estate environment made murky by the coronavirus-generated economic nosedive.
“Generally, if you own a medical office building, you know that you’re going to probably survive the storm. I think [the medical office sector] is going to survive a storm stronger than most other asset classes,” says Fahri Ozturk, first vice president with commercial real estate services company Marcus & Millichap.
Among 18 commercial real estate sectors, medical office presents the lowest level of risk in a COVID-19 recession, according to a report released March 26 by Green Street Advisors LLC, a real estate research and advisory firm based in Newport Beach, Calif.
Simply put, the medical office market is recession-resilient, according to Chris Bodnar, vice chairman and co-head of health care capital markets at commercial real estate services company CBRE.
“It is a niche market, with significant demand by investors and with limited supply,” Bodnar says. “This supply-demand imbalance, combined with a very disciplined development market, will continue to provide stability … .”
A December 2019 report from CBRE indicated that demographic trends—namely an aging population—and shifts in the health care industry would support long-term demand for medical office space.
Through mid-2019, the U.S. medical office vacancy rate remained at 10.3 percent—its lowest level during the most recent economic expansion—and average asking rents stayed near record levels, the CBRE report noted. U.S. institutional investors, foreign investors and REITs have fueled demand for medical office properties.
One of the investors that continues to be sold on the prospects for the medical office sector is Harrison Street Real Estate Capital LLC, a Chicago-based investment management firm.
In late March 2020, well into the coronavirus crisis, Harrison Street bought The Woodlands Cancer Center, a class-A, 208,000-sq.-ft. medical office building in suburban Houston that’s fully occupied by the University of Texas MD Anderson Cancer Center.
The coronavirus-propelled economic downturn hasn’t dampened Harris Street’s enthusiasm for medical office properties. Christopher Merrill, co-founder, chairman and CEO of Harrison Street, says his firm will continue to be an active investor in medical office assets. Since its founding in 2005, Harrison Street has invested nearly $6 billion in the sector, representing 16 million sq. ft. across more than 250 properties.
“As essential service providers, many medical office facilities continue operating without disruption, regardless of the environment,” Merrill says.
Those essential services include imaging, laboratory testing, diagnostic services, cancer and disease treatment, emergency care and outpatient surgery.
Harrison Street isn’t the only investor forging ahead with medical office purchases in this uncertain economic climate.
In late March 2020, JLL Capital Markets announced it had wrapped up the $20 million sale of Bella Terra Medical Plaza, a 59,354-sq.-ft. medical office building in Huntington Beach, Calif. The buyer was Manhattan Beach, Calif.-based Manhattan Real Estate Holdings Inc.; the seller was Los Angeles-based Vibe Inc. The class-A asset is about 90 percent leased to a number of medical tenants.
One key aspect that makes medical office properties appealing to investors like Harris Street and Manhattan Real Estate Holdings is this: Many tenants stay put for 20 to 30 years, according to Marcus & Millichap’s Ozturk. Medical office tenants often don’t want to move because patients have become familiar with the office locations, he says.
In the short term, though, the medical office market might face trouble, as some offices have temporarily shut down during the coronavirus pandemic and might struggle to pay rent, Ozturk says.
But patient traffic at medical offices will bounce back, driven by overall growth in health care spending and the ongoing trend of medical procedures being performed at outpatient facilities rather than hospitals, according to Britton Costa, senior director of credit ratings agency Fitch Ratings Inc.
“We’re interested to see whether this time is the catalyst for greater adoption of telemedicine for certain specialties as regulatory barriers are removed and patients are more willing to try it, given the lack of alternatives,” Costa says.
Amid the coronavirus crisis, some real estate investors are ratcheting down their activity in hard-hit sectors like retail and lodging. But CBRE’s Bodnar says most of his deals for medical office properties are going ahead despite challenges with coordinating tours and arranging third-party inspections.
“Given the current market environment, investors are looking to invest more in defensive industries like medical office,” Bodnar says. “The current market environment has put a spotlight on the need for health care facilities and the demand for services by patients.”
As such, Bodnar foresees a positive future for the medical office sector.
“There will always be a need for medical office buildings, and technology will have a bigger impact on where these facilities are to be built and how they will be designed in the future,” he says.
Health-centered communities, neighborhoods where millennials, baby boomers, technological advances, and new health care delivery models all converge, can be the blueprint of urban and suburban planning even in the age of COVID-19 and especially post-COVID-19, says Dennis Frenchman, Director of the MIT Center for Real Estate and the Class of 1922 Professor of Urban Design and Planning.
“Baby boomers are looking for convenient, affordable, aging-in-place health care options. Millennials, meanwhile, are pursuing physical environments that support their well-being and community-centric values,” Frenchman tells GlobeSt.com. “Our goal is to provide a blueprint for how to navigate these complex and profound demographic and cultural shifts taking shape throughout our society.”
Frenchman and his colleague, Stanley Shaw, plan on offering the course, Developing Health-Centered Communities: The Next Revolution.” in Real Estate in the Fall.
Baby boomers are aging and healthcare is foremost on their mind while most millennials are trying to lead healthy lifestyles by eating healthy foods and leading active social lives.
“These two generations are colliding in terms of health and wellness,” observes Frenchman.
Another plus to these communities for baby boomers how older buildings relate to their health.
“Living and working in an older, poorly ventilated building can negatively contribute to your health and longevity,” explains Frenchman. “If you have better quality air, sunlight and an overall healthy environment, landlords and developers can get premium rents.”
For these and other reasons, millennials are now suggesting their parents move to a health-centered community where parents can age in place instead of assisted-living facilities. As a result, the younger generation has more contact with the older generation, Frenchman says.
These communities tend to feature health centers in addition to the ubiquitous clubhouse. The developers also encourage walking around the community instead of driving everywhere. Instead of flattening hills, developers keep them intact to promote more exercise and movements.
“Health-centered communities also feature bike trails, social opportunities, horse stables and wellness programs,” says Frenchman. “Developers who offer these products will garner a lot of interest from all age groups.”
COVID-19
People are naturally social animals and the coronavirus has thrown a wrench in attending or hosting social events. In this age of social distancing however, healthy-centered communities can easily adapt to not interacting or engaging at any given time.
“Technology will solve some of the need but not necessarily all. However, it can work for a period of time,” explains Frenchman. “With digital technology, and in a health-centered community, patients are monitored remotely in their own environment. They can actually monitor their own oxygen, pollutants, carbon monoxide, etc. These tests are important for many reasons but it also shows you the physiological response of people as they live on their own environment.”
Frenchman believes these health-centered communities are simply a better way of living.
“There are less ER visits and less hospital stays,” says Frenchman. “Encouraging people to use their body and minds and overall just take care of themselves in this age of COVID-19 is always a good thing and it can also result in profits.”
It’s hard to imagine many stocks will do well through the coronavirus pandemic. But health care stocks and real estate investment trusts tend to be defensive sectors that investors flock to because they pay huge dividend yields.
So what happens when you combine the two?
Health care REITs might be a good bet in this scary market environment. Many are positioned well to help manage the COVID-19 coronavirus crisis, particularly companies that own and operate hospitals, medical offices and life sciences and biotech facilities.
“Health care REITs are generally the most defensive, economically resilient property type in the REIT industry,” said CFRA Research analyst Kenneth Leon in a report last week. “The group offers steady cash flow, low risk of rental rate volatility, and stable occupancy levels.”
Leon said that three in particular that he’s recommending are Alexandria Real Estate Equities (ARE), Healthcare Trust of America (HTA) and Medical Properties Trust (MPW).
Healthy Dividend Yields Are A Big Plus In Uncertain Times
The recent interest rate cut by the Federal Reserve may also help boost health care REITs — and all real estate firms — because of their solid dividend yields.
The three healthcare REITs that Leon recommends pay dividend yields ranging from 2.7% to 5%. With the Fed widely expected to slash interest rates again at its meeting next week, perhaps all the way back to 0%, the income that REITs generate will become even more tantalizing to investors flocking to safe havens.
“While COVID-19 has created near-term economic uncertainty, the REIT industry’s strong earnings, solid balance sheets, and high occupancy rates demonstrate that they are entering this situation well-positioned to handle a potential economic slowdown,” said Steven A. Wechsler, president and CEO of the Nareit trade group.
Senior Living Centers Look Risky
But not all health care real estate firms will thrive. Leon thinks investors should avoid companies that run senior living centers, because they won’t be able to safely show their properties to prospective new residents. He noted that many went into lockdown mode during the flu season of late 2017 and early 2018. And the COVID-19 outbreak is even scarier.
“Coronavirus may limit senior housing operators from showing their properties to prospective residents,” Leon wrote. “Precaution is a top priority for health care operators to better control an elevated death rate from severe flu conditions for the elderly.”
Leon remains wary of companies that operate senior housing centers, most notably Healthpeak Properties (PEAK), Ventas (VTR) and Welltower (WELL). Their rental revenue and profit growth will probably be squeezed by the admission of fewer residents.
“Operators cannot conduct visitor tours and sign up new residents.
Senior housing is in effect quarantined to new prospective residents and their families,” Leon wrote.
Anyone who has kept an eye on the healthcare real estate sector over the past several years is aware of the property type’s reliability amidst increasing economic uncertainty, which has resulted in growing interest among investors.
However, for what has become one of the hottest investment sectors in recent years, transformations underway within the healthcare industry will bring changes to the asset class over the next decade.
The market fundamentals are easy to understand. According to a recent report from Real Capital Analytics, United States-based healthcare real estate assets account for over $1 trillion in market value. Physician visits by baby boomers are expected to nearly double in the next decade; it is also projected that by 2060, one in four people will be over 65 years old. These factors make it clear that this already large market is positioned for continued growth.
However, in crowded regional healthcare markets like Philadelphia, which features several large competing healthcare systems and a variety of growing specialty networks, that growth will not just be more of the same.
Changes in Delivery
Traditionally, the American healthcare delivery model centered on hospitals, which meant that medical office buildings tended to be clustered near hospitals and other large inpatient medical facilities. These facilities were easy for doctors to access and provided enhanced services close to individuals’ primary points of care.
In recent years, the healthcare delivery model has undergone a dramatic shift, with outpatient and ambulatory facilities becoming primary points of care. This trend has unfolded almost simultaneously with the wave of consolidations and mergers that has swept through the industry in the last decade.
Working in tandem, these two trends have created a healthcare industry that is dominated by large healthcare systems searching for enhanced geographical footprints to better and more conveniently meet the health and wellness needs of the populations and communities they serve.
Key User Demands
Real estate plays a key role in a healthcare system’s ability to make quality care more accessible. As such, the demand for well-located, quality space continues to rise, attracting a greater number of investors than in prior years
Although location still plays a vital role in healthcare real estate investment, the criteria behind what makes a location desirable has shifted. Since medical buildings no longer need to be immediately proximate to hospitals, today’s best locations are those where people already are living, shopping and working. Whether this comes in the form of a purpose-built medical office building in the heart of a growing community or a retail location next to popular cafés and shopping destinations, today’s healthcare consumers prioritize convenience above all else.
Visibility is also playing a larger role in site selection for new healthcare projects. Expanding networks want their names out in the market, and they want people to be aware of their presence in the local community. This “retailization” of healthcare is highlighted by many medical office tenants’ requirements for signage and high visibility in their search for space.
Flexibility is also a main factor in today’s marketplace. Physician groups and healthcare systems require spaces that can accommodate the shifts in how care is delivered while also provide the flexibility to cater to telemedicine and other technologies that are transforming how people access care.
Project Example
Just outside of Philadelphia in Washington Township, New Jersey, the 35-acre Washington Square Town Center development addresses all of the factors discussed above.. With an increasingly cross-generational population and changing delivery model, medical space was a key component to the mixed-use project.
Working closely with Rothman Orthopaedic Institute, one of the region’s largest independent orthopaedic practices, a 40,000-square-foot, state-of-the-art medical office building was created at the gateway to the community that includes multifamily housing and retail options.
The healthcare trend has even been extended to the project’s residential component, with a 110-bed assisted living facility currently under construction to join the 330 residential apartments and 100 townhomes on the property. Today, the Rothman Medical Building stands fully occupied, and the retail component has seen tremendous interest from both medical and traditional retail tenants.
Not only do projects like the Washington Square Town Center allow the community to enjoy increased access to diverse medical services in a variety of settings, they also provide growing regional networks with a highly visible footprint in new communities to foster their continued growth.
Looking to the next decade, the healthcare real estate industry is positioned for tremendous growth. Leading this growth will be the developers and investors who truly understand the needs of an increasingly consolidated healthcare industry and can creatively imagine projects to meet both its short- and long-term needs.
While many areas of bricks-and-mortar retailing face headwinds, one shows signs of growth and promise: health care and medical services offered within stores and shopping centers. These services extend beyond the pharmacies and optical shops that have long had a presence within many retail outlets, and now include checkups, vaccinations and management of chronic conditions like high cholesterol.
Two large drug store chains are among those at the front of this trend. Working with health care provider partners, Walgreens operates more than 230 retail clinics run by nurse practitioners. On top of that, since 2018 the Chicago-based retailer has introduced primary care centers staffed by physicians in about a dozen stores.
In 2006, CVS acquired MinuteClinic and now operates 1,100 MinuteClinic locations in 33 states and Washington, D.C. The clinics offer vaccinations and help with minor illnesses and diabetes monitoring, among other services.
Drug store chains aren’t the only companies mixing retailing and health care. In late 2019, the Mall of America in Bloomington, Minn., opened a walk-in clinic in partnership with M Health Fairview, itself a partnership between health care provider Fairview and the University of Minnesota. The 2,300-square-foot clinic offers five exam rooms and services including laboratory and radiology.
Now open in two Georgia locations, Walmart Health offers primary care services.
Walmart Health, now open in two Georgia locations, offers primary care. The company plans to expand to other communities and is opening a handful of additional sites in 2020, says Walmart spokeswoman Marilee McInnis.
Driving factors
Several considerations are behind the desire to bring health care to retail locations. “Patients can benefit from more convenient access to high quality care,” says Jim OConor, Walgreens’ senior vice president of U.S. health care strategy and development. Many retailers and shopping centers are positioned to address this need; about 78 percent of Americans live within five miles of a Walgreens store, OConor says.
What’s more, many malls have excess space, says Wendy Liebmann, CEO of consulting firm WSL Strategic Retail. Retailers and shopping centers can attract and retain customers, who like the convenience of handling both their health care and shopping needs in one trip. For 100 Oaks Mall in Nashville, Tenn., bringing health care into its retail mix was key to its survival: The mall was struggling when Vanderbilt Health took over about half its 850,000 square feet, now used for both clinic and office space.
Using retail locations to provide health care also might help drive down costs. While Liebmann isn’t an expert on the cost of health care, she talks with many people who are. “They see community-based health care as one way health care costs can be contained,” she says.
Americans’ interest in health and wellness is another motivator. This includes both preventative care as well as the need to manage chronic conditions, many of which become more prevalent with an aging population. “This huge focus is one of the biggest consumer spending opportunities in decades,” Liebmann says. “It’s the ‘big business of well.’”
At the same time, many hospital systems are in “growth mode,” says Todd Caruso, senior managing director with a focus on retail at commercial real estate firm CBRE Group. Moreover, executives with many systems recognize the opportunities available in outpatient care, much of which can be handled in a retail setting.
Some newer doctors and dentists, especially those graduating with mountains of debt, might decide a position at a retailer with a nice salary is more feasible than trying to buy out a practice when a doctor retires. “It’s not for everyone, but some may feel under the gun, and pressed financially, to start generating income,” Caruso says.
The models
Retailers are taking somewhat different approaches in the ways they provide health care services. Through its physician-led primary care centers, Walgreens combines its core pharmacy expertise with care provided by organizations like Partners in Primary Care, Village Medical and Southwest Medical Associates. The result is “a neighborhood health destination around a modern pharmacy that brings affordable health care services to customers,” OConor says.
Walgreens combines its core pharmacy expertise with care provided by organizations including Partners in Primary Care.
While it might seem that the expansion of services to primary care would overshadow the need for pharmacies, that’s not necessarily so. As OConor notes, many older individuals have chronic conditions, and pharmacists often play a significant role in these patients’ efforts to manage their conditions.
Walgreens’ pharmacists have “specialized knowledge and training to help manage chronic diseases, provide medication therapy management support, administer life-saving immunizations and provide education and counseling to assist patients with their health care needs,” he says.
In addition to its primary care centers, Walgreens offers clinics across the country through partnerships with local health systems. These are run by nurse practitioners and provide acute care. By partnering with local health systems, patients are able to receive care at their local Walgreens while seeing a provider that may be within their larger health system network, OConor says, and with whom they have an existing relationship.
Walgreens also offers weight loss management and diagnostic lab testing, and select stores are trialing dental, optical and hearing services. In addition, UnitedHealthcare and Walgreens have opened a handful of UHC Medicare service centers, where Walgreens customers can learn more about Medicare plans, meet with service advocates to discuss their UnitedHealthcare benefits and enroll in plans.
For its foray into more extensive health care services, Walmart Care Clinic focuses on bringing accessibility, affordability and transparency to primary care. The clinic encompasses diagnosis and treatment of chronic and acute illnesses, as well as preventative services and additional screenings. Patients booking appointments receive estimates of the costs, and the website lists prices for common services. The transparency “is taking the guesswork and complexity out of getting care,” McInnis says.
Feedback from both medical providers and patients has been positive, she says. Clinicians say they appreciate the integrated care model and the ability to address the diverse health needs of the community, and patients like accessing health care conveniently and affordably.
Accessibility and quality underpin the approach to health care by M Health Fairview, says Jakup Tolar, dean of the University of Minnesota’s medical school. “Our general approach to health care is to meet patients where they are,” he says. “We seek to make it as easy as possible for patients to interface with their health care providers.”
The M Health clinic at the Mall of America offers physicals, vaccinations and other services, as well as help for travel-related issues.
The reception to the clinic has been positive, says Jill Renslow, senior vice president of business development with the Mall of America. It’s easily accessed by the approximately 13,000 employees working at the mall, as well as guests staying at the two hotels connected to the property. That’s in addition to customers shopping at the mall. To serve the diverse group, the clinic offers physicals, vaccinations and other services, as well as help for travel-related issues.
“We’re fully prepared to scale this,” Tolar says. “We’ll go to different malls and different places where people go. We’re making health care simpler without compromising care.”
Halifax Shopping Centre in Halifax, Nova Scotia, is home to a range of health service providers, including medical, dental and breast-screening clinics and opticians. “We are looking to be a destination for customers, from shopping to dining, as well as health and wellness,” says marketing director Stephanie Schnare. The mall, which is on a bus line, is connected to several office buildings and near six universities, which host more than 50,000 students, including a large percentage of international students. “They find it convenient to hop on the bus, come to the shopping center and visit the clinic and dentist,” Schnare says.
Challenges
While the move to combine health care and retail shows no sign of stopping, it’s also not without challenges. One is building trust. “How do you show people they can trust you to deliver quality services?” Liebmann says. The idea of a “doc in a box” providing care from a retail location has rarely inspired confidence in potential patients. Similarly, some health care providers may balk at providing care in a non-traditional setting.
Another key is ensuring the quality and transparency of the services. At times, it’s hard to tell if some store-based clinics are staffed or even open, Caruso says. Who is providing care — that is, an MD or another medical professional — also can be unclear. “That fosters some skepticism,” he says.
Incorporating health care services within a retail setting often changes the business model. It could require an investment in space and medical equipment, as well as a trained medical staff. The product mix in the store could change, with more space devoted to medicines and equipment like walkers. “That conversion is important and not inexpensive,” Liebmann says.
And, as always, location is key. “The easier to access, the better,” Tolar says. The M Health Clinic is near an entrance to the Mall of America, where it has reserved parking.
Clear wayfinding also is critical, especially for medical services provided within shopping centers. Patients entering a mall may be nervous and focused on their upcoming visit; a confusing trek to get to a medical provider only adds to their anxiety. To alleviate this, Schnare says Halifax Shopping Center recently launched a text concierge service to help with wayfinding.
While the challenges are real, the promise of offering health care in a retail setting is as well. Changing demographics — most notably, an aging society with a generally increasing need for health care — along with growing interest in health and wellness will drive continued interest in the mix of retail and health care. “I don’t think we’re in the ninth inning,” Caruso says.
Similarly, consumers have grown increasingly used to the idea that the products and services they need be as convenient to access as possible. Adding health care to a retail mix is one way to accommodate this.
There is 436,514 square feet under construction in the city with internationally known Aventura Mall and high-end condominium towers.
All will be Class A offices in a city where most of the existing inventory, nearly 799,000 square feet of a total of 1.13 million square feet, already is Class A, according to JLL data.
Aventura’s office market is focusing on high-end corporate towers like Inmobiliaria’s Optima complex and a medical district with offices for physicians and other health care and wellness providers.
Construction of the 12-story, 96,000-square-foot Forum Aventura at 19790 W. Dixie Highway just outside city limits wrapped up last year. The Optima complex at 21500 Biscayne Blvd. is to get its biggest building later this year when the 28-story, 300,000-square-foot Optima Onyx opens in Hallandale Beach, Broward County’s southernmost city bordering Aventura. On the Aventura side, the nine-story, 84,401-square-foot Optima White and four-story, 29,621-square-foot Optima Red were completed in 2013.
The budding medical district is growing following expansion of Aventura Hospital and Medical Center, which upgraded and added 22 rooms in a $75.6 million emergency room buildout. It then embarked on a 513-space garage and a three-story, 60-bed patient tower bringing the total number of hospital beds to nearly 500. The hospital owned by publicly traded HCA Healthcare Inc. three years ago obtained a Level Two trauma designation, one of two in Miami-Dade County.
North of the hospital, the 12-story Aventura Medical Tower was completed last year by The Faith Development Group, bringing 105,000 square feet of medical office condos. The tower at 2801 NE 213th St. is comprised of a seven-story, 472-space garage under five stories of offices.
On its heels to the east will be the medical office project Ivory 214 and 12 I 12 Aventura, 10-story buildings to be connected by a pedestrian bridge over 28th Court west of Biscayne Boulevard.
Healthcare providers are continually seeking cost-effective ways to deliver care. As construction costs rise, some are choosing to repurpose facilities instead of building new ones.
One example of this is the Texas Children’s Hospital, located in the Texas Medical Center in Houston. The hospital is repurposing seven floors of its West Tower, a 20-story hospital building that went through initial construction in 1991 and had additional floors added in 2001.
The seven floors being redone were vacated when Texas Children’s Hospital relocated some services to its new Legacy Tower in 2018. Two of the floors were inpatient nursing units. In planning the backfill of the seven vacated floors, those two floors were proposed for additional nursing units to address inpatient needs, and repurposed into “new” nursing units. The refresh of those two particular floors allowed the hospital to upgrade technology, repair aged fixtures and materials, implement updated signage and artwork, refresh the look and feel of the unit, and focus on medical specialties in need of beds.
“What we’re finding is, we’re doing this repurposing at half the cost of what new would be,” said Texas Children’s Hospital Vice President of Facilities Planning & Development and Real Estate Services Jill Pearsall, who was one of the panelists at Bisnow’s National Healthcare South event Feb. 13. “The other five floors are being planned for a variety of other uses, some for direct reuse, while others will receive significant demolition and renovation.”
New construction is expensive, and that cost is often passed onto consumers. Transwestern Executive Vice President of Health Advisory Services Justin Brasell said that only some end users can afford a new building, as rents have to reflect the returns required by new owners to take on the risk of building a new project. Brasell said he has seen many older buildings being repurposed, often in less urban areas with more green space. Those buildings tended to have a less efficient build-out, and part of the repurposing involved utilizing space that might otherwise be wasted, such as large atriums.
The challenge of reducing operational costs and construction costs while providing high-quality medical care has been an ongoing trend in healthcare for years, but has reached a new level of intensity, according to Baylor Scott & White Chief Innovation Officer LaVone Arthur.
“When we talk about the reduction of cost, from a provider side, we are every day trying to squeeze out every penny we can from our cost,” Arthur said. “We are just now taking control of trying to manage the cost to our consumers.”
The panelists also discussed other trends in the market, including the decentralization of healthcare. More health systems are redirecting patients to facilities located in neighborhoods to treat lower-acuity cases. Pearsall noted that an urgent care in a community setting does not have to be the same quality as a hospital. She said it is important to manage both internal and consumer expectations of how much investment should go into certain facilities.
“We are really working to develop the right facilities, in the right location at the right cost,” Pearsall said.
The trend of decentralizing care has moved further away from traditional hospitals, with technology developing to allow patients to access care in their own home, through methods such as telemedicine.
“Every health system out there is actively pursuing virtual options, because it’s a lower-cost option, and it also is providing access,” Arthur said.
The technology and infrastructure demands in hospitals and healthcare spaces have also changed over time. Everybody wants emergency power, as well as extensive redundancies built into a system to improve reliability.
“The demand for low-voltage infrastructure in new buildings is also significant,” McCarthy Building Cos. Vice President Preston Hodges said. “Nearly every hospital in the Texas Medical Center, and across Texas, is building or developing something right now. Just about every institution has a large initiative either underway in design or underway in construction.”
As a result, the demand for high-quality contractors and subcontractors has become fierce, with healthcare providers competing for labor earlier than ever before.
“These clients are going to secure teams earlier and earlier,” Hodges said.
With empty land in the Texas Medical Center at a minimum, and needs constantly evolving, Hodges believes demand for backfill and renovations will only grow.
When it comes to new design and new concepts, Arthur said she is most concerned with flexibility and creativity. Arthur points to the examples set by nontraditional players in the healthcare field, like Amazon and Google, and how the industry was closely watching what those technology leaders were doing in an attempt to keep pace.
“Healthcare is changing very quickly, and I think we are on an unprecedented path,” Arthur said. “If you’re building a traditional hospital today, something’s wrong.”
Nicklaus Children’s Hospital plans to sell the failed Miami Medical Center, a specialty hospital that Nicklaus Children’s bought just over two years ago for $88 million, after deciding to focus its growth strategies on more outpatient clinics and its own Coral Terrace campus.
The decision to sell the building follows a year of financial instability, layoffs and administrative changes. At the time of the purchase, in December 2017, questions surrounded the financial underpinnings of the deal. That included questions about the nonprofit Nicklaus Children’s financial interests in the for-profit ventures associated with the Miami Medical Center. Miami Medical Center, located near Miami International Airport, closed in October 2017.
Matthew Love, who took over as chief executive officer on an interim basis in June last year, also announced this week that he will begin serving as the hospital’s permanent CEO. Love said he couldn’t answer questions about the relationship between the nonprofit hospital and the for-profit ventures because much of the arrangement predated his time with the hospital.
Before the bankruptcy filing, one of Miami Medical Center’s biggest investors was Nicklaus Children’s, which served as shareholder, lender and manager of the hospital through a venture called Miami Hospital Holdings. In March 2018, the company that operated Miami Medical Center filed for Chapter 11 reorganization, listing $21.4 million in assets and $67.3 million in liabilities.
Love said the hospital has retained an outside consulting firm to help with the sale, and that Nicklaus Children’s board signed off on the decision to sell. The CEO declined to list a specific price for the facility but said Nicklaus Children’s would sell the building for the “best price we can get.”
“The sale makes sense with Nicklaus Children’s growth strategy,” Love said. “When you talk about expansion and growth, it doesn’t always have to be brick and mortar. Miami Medical Center was right down the street. What I’m not really interested in is replicating high-end services — those are expensive.”
Sal Barbera, a former healthcare executive who now teaches healthcare administration at Florida Atlantic University, said he thinks the decision to sell the building goes beyond growth strategies and has more to do with the hospital’s current financial condition.
“They need to unload that asset, they need the cash,” Barbera said. “They didn’t buy it that long ago.”
In 2014, Nicklaus Children’s — when it was still an investor — signed on to guarantee up to $70 million of financial obligations related to Miami Medical Center. When the private hospital defaulted on its debts, Nicklaus Children’s paid a total of $14 million in 2017 and 2018, according to an analysis by Fitch Ratings.
During 2018, Nicklaus Children’s also funded $7 million of Miami Medical Center’s operating costs as part of its obligations. Miami Medical Center’s bankruptcy was finalized in January 2019.
The company that invested in Miami Medical Center was partly owned by a for-profit corporation whose officers were made up of Nicklaus Children’s board members and executives, including former CEO Narendra Kini, former CFO Timothy Birkenstock and April Andrews-Singh, a senior vice president and general counsel.
Love, the current CEO, said he is hopeful that the Florida Legislature’s deregulation of hospital building guidelines will make the facility attractive to out-of-state healthcare providers or providers from elsewhere in the state.
“What I’m interested in us doing is focusing on the fundamentals,” Love said. “We’re the best pediatric healthcare provider in Florida, and we need to focus on that. That’s who we are.”
