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Healthcare Providers Still Have Lots Of Traditional Office Space. But Not For Long

Faced with rising costs on all sides without a surge in revenue to compensate, healthcare systems are desperate to cut costs in ways that don’t impact patient care.

One part of the balance sheet where they seem to be focusing is in office space — not medical office, but the traditional kind.

HDR's Adam Hayes; Main Line Health System's JoAnn Magnatta; Jaros, Baum & Bolles' Gina Semerad; and Anchor Health Properties' Albert Lord

Healthcare providers have occupied traditional office space for administrative uses for decades, but with the remote work revolution spurred by the pandemic, many in the industry see a savings opportunity at a time when it is desperately needed.

Aside from the rising costs of building construction and maintenance, the financial picture has worsened dramatically for the basic act of caring for a patient.

“We’ve all talked about how the acuity of the patients has increased, but the reimbursement has not,” Main Line Health System Senior Vice President of Real Estate Design and Construction JoAnn Magnatta said at Bisnow’s Philadelphia Healthcare and Life Sciences Conference at 401 North Broad St. in October.

“For every healthcare organization in the Delaware Valley, this is probably the first time, or the first time in a few years, that we have ever been in a position where capital is becoming so tight. We all have lost money this year.”

On the same panels where real estate executives for the region’s largest healthcare providers talked about how much the industry has changed and how much healthcare real estate needs to change with it, those same professionals acknowledged the extent to which rising costs have complicated the planning process for new projects.

“We’re just being pushed in every direction right now,” said Gina Semerad, senior associate at engineering firm Jaros, Baum & Bolles. “It really takes a team effort from the construction manager, the owner, the engineering team and the design team to really find solutions to these new problems that just didn't really exist a few years ago.”

Real estate makes up over 40% of the average healthcare provider’s balance sheet, JLL found in its annual healthcare and medical office industry report released on Wednesday. Traditional office space can feel like a frivolous usage of budget dollars when compared with the mission-critical real estate that is used to treat patients.

CBRE's Jody King, Thomas Jefferson University's Clayton Mitchell, University of Pennsylvania Health System's Allison Wilson-Maher, Children's Hospital of Philadelphia's Donald Moore and DPR's Deb Sheehan

“We have three corporate facilities,” Magnatta said. “By the end of the year, we're trying to determine, ‘Will we continue to lease all of those facilities? Will we still need to inhabit them?’”

Main Line Health, which allows for fully remote and hybrid work among its administrative employees, is using worker preference to determine how many dedicated desks it needs and how many can be shared, or “hoteled,” Magnatta said. Once that analysis is finished, Main Line Health will either give back leftover space or repurpose it for more patient-focused uses.

The University of Pennsylvania Health System has already made that determination about its own administrative footprint, Penn Medicine Vice President of Real Estate, Design & Construction Allison Wilson-Maher said at the event.

“We did a space audit, and 10% of our 600K SF is currently being used — just 10,” Wilson-Maher said. “That's a lot of space not to be used. So we're recycling 300K SF for a different use because we own it. And the other 300K SF, we are likely going to be giving up and going somewhere to consolidate to a much smaller footprint.”

While being able to exit a lease is a straightforward way to save money, that real estate could also be used toward the expansion pressure that providers continue to face, and which has become much more difficult to meet in the current capital environment.

Hilco Redevelopment Partners' Meghan Kelly, Netrality Data Centers' Dave Hagan, CIC Philadelphia's Michelle Ottey, Scheer Partners' Trevor Harris, Gattuso Development Partners' Janice Wong and Vicinity Energy Partners' Brian Mueller

“We're all struggling to find out how we can continue to move forward and keep up with the level of development that we've spoken to today,” Magnatta said.

Considering the huge energy costs and engineering needs of hospital buildings, providers like Thomas Jefferson University’s Jefferson Health, Penn Medicine, Children’s Hospital of Philadelphia and others are trying to cram more functions and potential uses into each square foot. If a service doesn’t need to be provided in a hospital setting, it is a candidate for being pushed into another type of building, panelists agreed. 

Also pushing providers in that direction is how much more stress is being put on hospitals when other facilities close in the region. Crozer-Keystone Health System parent company Prospect Medical Holdings is attempting to shut down the emergency and acute care divisions at Delaware County Memorial Hospital, and a court order requiring negotiations with the health system’s former nonprofit owner was the only thing forestalling that closure as October turned to November.

“We’re rooting very aggressively for a number of those facilities [where closures] are pending or being talked about to stay open,” Magnatta said. “There just is not going to be the capacity for those patients … There is a real fear. So we’re working on how we can accommodate those patients and it’s not easy; we can’t get facilities up fast enough.”