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Health Systems Re-Examine Real Estate Footprints Amid Financial Pressures, Changing Demand

Healthcare systems, facing financial pressures from staffing shortages and stagnant revenues, are exploring ways to save money in their real estate portfolios.

Industry executives speaking at Bisnow’s Boston Healthcare Real Estate Summit last week said providers are making the offices and medical spaces they have more efficient rather than expanding. Some have even looked toward more creative ways to bring care to patients, including home care and mobile clinics.

Healthcare systems are also pushing more services into outpatient facilities, which can create challenges for providers but serve as attractive targets for investors.

HDR Architecture's Jessica Stebbins, Innova Group's Wendy Weitzner, Boston Medical Center's Nancy Hanright, Brigham and Women's Hospital's Sonal Gandhi, CUBE 3's Matt Bluette and Wise Construction's Kerry Pavey.

“We cannot afford to be inefficient with space anymore because it’s too costly,” Nancy Hanright, senior director of real estate and space planning at Boston Medical Center, said at the event, held at the W Boston hotel. 

Medical centers have been hit hard as the demand from patients has skyrocketed coming off the peak of the pandemic, an impact compounded by worsening staff shortages throughout the country. This has led to underutilized buildings and even closures of offices that can't afford to stay open.

“Staff shortages have a huge impact on our operations and, frankly, on our revenue,” said Sonal Gandhi, vice president of real estate, planning and construction at Brigham and Women's Hospital. “We’re in the position where we have to pay double and triple for travel nurses. We need the staff.”

On Wednesday, a birthing center in Leominster announced plans to shutter its doors due to staffing shortages and a decline in births in the area, GBH reported. The unit, which is part of UMass Memorial Health's HealthAlliance-Clinton Hospital, administered 500 births last year.

The closure would add to the state’s “maternity service desert,” which has been exacerbated by the closure of nine birthing units, according to the Massachusetts Nurses Association.

Since February 2020, 1 in 5 healthcare workers has quit, according to JLL’s 2023 Healthcare Investor Survey. This has put a damper on any new development that hospitals and healthcare systems pursue to meet demand.

“They have incredibly tight margins, and it’s really kind of a travesty that we see happening where they are getting squeezed almost every year from a multitude of forces, and revenue growth is really challenging,” MLL Capital President Kyle O’Connor said.

Newmark's Michael Greeley, AEW Capital Management's Jennifer Wong, MLL Capital's Kyle O'Connor and Timberline Construction's Jim Davis.

Innova Group partner Wendy Weitzner said some providers have an uneven distribution of services, with some areas having redundant facilities and others being uncovered, which she called “white spaces” in their care.

“You might have three cardiology practices within 3 miles of each other in a market because they acquired different practices over time, and each one of those facilities is underutilized and in poor condition,” Weitzner said.

Although some providers are struggling to grow revenue, there has also been a shift in the location of some of their services. As patient preferences have changed, more services are being transferred from inpatient to outpatient facilities.

Home care has seen a rise as inpatient beds become less available. Brigham and Women's Hospital has at least 30 beds it uses for hospital-at-home care. Other hospitals have implemented mobile clinics to get out into communities that don't have access to inpatient treatment. 

"We're looking at ways to get care into the home," Gandhi said. "Any way we can get patients to get the same level of care that they would get in a hospital in a home environment, that's something we are looking at very actively and very aggressively."

Ambulatory surgical centers have become investment targets as demand shifts from inpatient to outpatient care, making up 26.8% of the healthcare sector's nationwide transaction volume in 2022, according to JLL. New technology advancements have made surgeries like hip replacements, which had historically been an inpatient service, available outside of the hospital.

However, there are challenges that come with moving certain services off-site, including a loss in revenue for health systems. 

Page's Jessica Petro, Tufts Medical Center's Diana Richardson, Redgate's Kristi Dowd and Syska Hennessy's Tim Krawetz.

"One of the realistic challenges, though, of moving things out of the campus is you get paid less," Weitzner said.

Weitzner said that moving outpatient activities out of the hospital can lead to value depreciation, and systems often don't end up saving money with the move. 

"Depending on the size of the hospital, if you move all the outpatient out, you have a zombie hospital," Weitzner said. "For some organizations, it might not be the right answer."

Rising interest rates have impacted the returns that healthcare real estate properties can achieve, as well as their exit cap rates, AEW Capital Management Director Jennifer Wong said. 

"Those two things have been completely influenced by the rise in interest rates, which makes your returns go down despite the physical building and everything else around it being exactly the same,” Wong said. 

Medical office buildings have continued to outperform other real estate sectors, although interest rates have slowed some transactions.

Deliveries of new medical office buildings slowed in 2022, with 1.2M SF nationally down from 1.7M SF in 2019, according to JLL. With fewer buildings coming to the market, medical office occupancy stabilized at 92.3% in the last quarter of 2022. 

O'Connor said he is seeing strong demand on the leasing side. 

"We're seeing it and feel it every day," O'Connor said. "We're more optimistic about that. We're in this dynamic that the capital markets have changed dramatically, but an offsetting fact to that is the fundamentals are continuing to stay strong and for some cases getting healthier for some buildings."