Part II - Optimizing the Real Estate Portfolio
In Part II of our discussion of Outlook 2017, Fred Campobasso, managing director and practice area leader of the healthcare real estate segment, opines on the evolution of healthcare facilities from traditional stand-alone facilities into wellness, prevention, and lifestyle environments. He concludes with insights into the direction of industry M&A activity and its impact on real estate portfolios.
Q. In Part I of Outlook 2017, we discussed trends to watch and how consumerism is becoming a power player in not only what kind of healthcare is delivered, but also the how, where, and when providers deliver that healthcare. If we consider these trends and consumerism in the aggregate, what impact does this have for how providers and alternative providers look at their facilities and real estate portfolios?
A. In response to the shift from not just treating the sick but to wellness, prevention, disease management, promotion of healthier communities, and value-based reimbursement, we believe providers are adopting new strategies and playing a key role in the development of healthcare-anchored, mixed-use developments that will extend beyond the borders of traditional medical campuses.
We've seen a movement towards healthcare villages, which will provide an opportunity for providers to create a hub for outpatient care, personalized health, research, and commercialization of innovative products and services, such as digital health mentioned earlier. This hub could become a very important centralized theme in a mixed-use development that includes residential, retail, education, commercial, recreation, and much more to promote the concept of a wellness-oriented live, work, learn, play destination site.
We're seeing many health systems today begin to plan, strategize and test the possibility of a healthcare village model. Creative and interesting partnerships are evolving including community, provider, and private sectors.
Finally, we also see the continuation of accessible, more efficient and customer-centric ambulatory care sites including free-standing EDs, urgent care wellness centers (what the industry is labeling as micro-hospitals) in urban and suburban markets, as providers strive for achieving their goals of right services, right location, right costs, and high quality of care.
Q. With the additional investment that providers will be making into these wellness and lifestyle villages, where does that leave the providers’ existing facilities portfolio, some which may comprise as much as 40% of a system's balance sheet?
A. As the healthcare industry continues to transform, we’ll see the need for existing hospital campuses, many that are obsolete-aged infrastructures, to redevelop with an aim towards right-sizing the in-patient chassis, modernizing the built environment to become more patient and customer-centric, thereby enhancing the overall patient/consumer experience while reducing the real estate footprint. Consolidation of inpatient facilities within multi-hospital systems will also occur.
In short, providers will continue to maximize efficiencies where possible. It's not as though all the spending is going to be on the outpatient or ambulatory side. The main and existing campuses will need to be redeveloped, but, it’s how they’re redeveloped.
One of the significant lessons learned from mergers and acquisitions over the last few years is that providers will need to increase the level of due diligence related to studying the combined real estate and facility assets as a part of the pre-merger processes in order to alleviate unanticipated capital costs post-merger.”
A. First, we believe partnerships via mergers and acquisitions as well as other structures will continue as “scale” remains a critical success factor. Further, we believe providers will carefully scrutinize their existing real estate and facility portfolios in an effort to optimize their assets and look for opportunities to consolidate, eliminate duplication, expand in growth-oriented markets, and monetize those non-core real estate assets, to free up capital for core strategic investments.
Looking at the overall healthcare real estate landscape as systems continue to grow through mergers and acquisitions, providers are finding themselves in situations where they have fragmented and under-utilized real estate assets across the entire continuum of care. There’s a heightened need to examine, plan, assess, and then execute a strategy to better optimize the overall real estate portfolio.
As mergers and acquisitions continue, there's an opportunity to increase the value of the systems real estate assets, reduce risks, and partner with third-party capital.