During the pandemic, the healthcare industry experienced a convergence of issues that has changed the way it has traditionally operated, particularly in how it uses its facilities. It’s not just one sector affected, either: the continued shift of inpatient care to outpatient centers, patients seeking certain amenities where they receive healthcare, baby boomers boosting demand for senior housing and services, etc. Healthcare providers are having to rethink and strategize their real estate needs and, in doing so, are finding areas of opportunities.
A recent Healthcare Financial Management Association (HFMA) survey of financial executives projected the median percentage of revenue from inpatient care to fall to 25% by 2030 from 40% in 2019. Not that it was a secret that in acute care, the hospital’s role in providing healthcare is shrinking as services are pushed to outpatient facilities, but the pandemic accelerated the move.
To be fair, inpatient revenue may be declining, but it doesn’t mean the healthcare systems themselves are; often, patients are just being sent to facilities that are still operated by the system. Regardless, with more patients going to nonhospital settings, healthcare providers are having to step it up by adding amenities to enhance the experience for the patients as well as their families or caregivers.
They are finding ways to improve and elevate their level of patient engagement since they want to engage with their patients and they want their patients to engage with them. The more investment they make, the more attractive their buildings are, the more amenities they have, the more likely patients will seek care rather than put it off.
Also, when they are taken outside the hospital setting, patients tend to have better outcomes either because of the way in which they receive certain services or that they have access to advancements in some types of technology.
To stay competitive, health systems should be evaluating their facility needs, particularly in light of fluctuating interest rates and rising construction costs. In the past, real estate strategy hasn’t always been top of mind for healthcare providers, but it should be when it’s such a significant investment for them.
So what can they do to leverage their real estate to help them grow and invest in other segments of their business? Healthcare providers have to create a strategy that takes into account the industry, their area, their patient population and their needs over the next five to 10 years. Once they have established who they are, what they want to be and what their surrounding area is missing, they can start finding pockets of opportunities.
The next step is understanding how much space the health system actually needs. Like most industries, healthcare providers are realizing their real estate isn’t being used effectively for their current needs. They may have an unused or underutilized space that could be leased or sold to a third party. Pharmacies are a typical example of a complementary tenant, but a coffee shop or other amenity could fill that space too.
Some spaces could be repurposed. For example, if a health system needs a smaller hospital facility, it may look into redeveloping its old building into workforce housing or some other amenity that is needed in the area. Beyond alternate uses for unneeded space, they can also simply sell any excess saleable land.
Another popular real estate tool is the sale-leaseback. This allows the healthcare system to sell its property to a capital partner who agrees to lease the property back to the system over a certain length of time for a specified rent. The structure of the lease is based on the type of facility being sold and the services it provides (e.g., a skilled nursing facility providing care would be underwritten differently than it would for a tenant just occupying and borrowing the space since there is not an underlying operation). For it to work best, the lessee and lessor’s outcomes have to be aligned for the long term.
Because the sale-leaseback may be a new concept for healthcare providers, they may want to test the water by trying it out with one of their smaller properties, like an ancillary asset outside the core hospital building.
Investors wanting to do sale-leaseback transactions are first looking for properties in desirable locations. But they are also looking for reliable tenants. In terms of the actual types of properties, though, most are being sought after, including acute care hospitals, outpatient centers, surgery centers and medical office buildings, as well as any senior housing facilities (skilled nursing, assisted living, memory care and independent living).The current economy is boosting interest in alternative real estate investments like this. These investors have no interest or involvement in the healthcare field. They are just looking for good, solid assets with good, solid tenants.
One other financing tool health systems should consider if they are looking to build in the next few years are New Markets Tax Credits (NMTC). Even though the program has been around for a couple of decades, it is often overlooked due to misconceptions about the credits.
The NMTC program was created to stimulate investment in low-income communities. It is administered by the Treasury Department through the Community Development Financial Institutions (CDFI) Fund. Community Development Entities (CDEs) apply annually to the U.S. Treasury Department for delegated authority to sell these federal tax credits. The proceeds from that sale are then used to fund investments, typically structured as low interest rate loans, in high impact projects, including projects that expand access to healthcare..
CDEs are the gatekeepers for the allocation. They look for eligible projects that will have a high impact in specific underdeveloped areas. The application process can be onerous, but the payoff is worth it as an NMTC can provide up to 20% of the project’s capital stack. (For example, if a developer only has $8 million for a $10 million project, an NMTC can fill in that gap.)
NMTCs works well for both not-for-profit and for-profit entities. Furthermore, it’s flexible capital, meaning it can be subordinated to other debt, has few restrictive covenants, has a longer amortization and is interest-only for seven years. And it may be the best tool for some projects that would not be able to get the financing to move forward otherwise.
No matter what real estate solution a healthcare provider chooses, the point is, it has options if it needs to raise capital. The industry is changing faster than it has in the past. Now is the time to establish an extensive capital projects plan that will allow the system to put funding where it needs to, whether that’s building more facilities, improving technology or investing in its people. Real estate is a living, breathing organism that healthcare providers have to pay attention to and cultivate to ensure it is not only having its needs met but also taking advantage of any untapped opportunities.