The Outlook for Investment in Health Care Properties: Medical Office Buildings and Outpatient Facilities (Jonathan Winer) - ULI fall meeting - 102811

Outlook for Investment in Healthcare Properties: Medical Office Buildings and Outpatient Facilities October 28, 2011

20 MILE RADIUS 55,000 EMPLOYEES 16.6 MM SQUARE FEET OF OWNED AND LEASED SPACE PARTNERS HOSPITALS

Key Trends
Over the next 10 years, outpatient demand is expected to grow at a rate greater than inpatient demand.
Increasing outpatient demand has implications for design and location of new facilities – continuing the trends of recent years
Technology advances have allowed for more outpatient procedures – and will continue to do so
Patient preference (convenience & access)
Capacity constraints at in-town hospitals lead to attempts to decompress tight environments or make them more efficient
Decant less acute inpatient volume to free up beds at AMC’s for complex cases
77 million baby boomers eligible for Medicare over the next 20 years will force providers to look at alternatives to acute care, with an emphasis on ambulatory and urgent care
Pressure to reduce costs and improve quality of medical care
In a competitive environment where consolidation is taking place
With significant outside regulatory pressures, including healthcare reform
In an industry with intensive use of energy (second only to foodservice industry) – need and desire to reduce that consumption
ALL OF WHICH SUGGESTS LOWER COST SETTINGS

How Much Space Do We Actually Need?
Some are saying that the 32 million people who will be newly covered under healthcare reform will drive a need for 64 million SF of new space
Since universal coverage in Massachusetts in 2006, over 400,000 people have been covered with no obvious demand for additional space
Independent of the projected impact of healthcare reform, in recent years there’s been an accelerating migration of care to the community and to the home
Demand for space is likely to be constrained by the supply of health care providers
EMR and other changes in technology will likely dramatically change delivery of medical care
Growing focus on increased utilization of existing space (e.g., increase patients per SF) through process improvement and re-design to facilitate greater patient throughput may curb healthcare’s appetite for growth

Approaches to Controlling Costs
Informal benchmarking survey of 12 other major health care systems conducted over past six months highlighted six real estate opportunities that are helping these systems reduce costs and increase efficiencies.
Standardization - building and room templates, universal specifications, materials, finishes and furnishings
Space Utilization - analysis and redesign of existing space for maximum efficiency and productivity, actually reducing demand for space
Construction Cost Control – clarifying project scope for tighter project estimating and controlling contingency
Investing in Maintenance - scheduled program of investment in deferred maintenance
Organizational Changes – centralizing or standardizing PM services
Strategic Real Estate Ownership

Strategic Real Estate Ownership
Owning is almost always cheaper long term than leasing because of the more favorable cost of capital and real estate tax treatment available to some healthcare systems
A number of institutions actively land bank as a way to provide for future expansion space and to reduce or control long-term occupancy costs
Some specifically took advantage of the most recent market downturn, acquiring land inexpensively to have options on hand to support a future expansion or growth strategy
In some cases, the land or buildings acquired are strategic to current operations because of their adjacency
In other situations, sites were acquired for development of a separate campus, housing clinical, research or support services
Some institutions are reducing their leased space portfolios in favor of consolidation in owned buildings, anticipating the impending changes in lease accounting rules that reduce the advantages of leasing

Conclusion
Uncertainty around impact of healthcare reform
Local market and health system configurations vary widely
Cost reduction imperative while maintaining or improving quality of medical care impacts space choices

The Outlook for Investment in Health Care Properties: Medical Office Buildings and Outpatient Facilities (Jonathan Winer) - ULI fall meeting - 102811

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