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Health Care Reform: Boon for Commercial Real Estate?

By Sibley Fleming, NREI managing editor


As President Obama signed health care reform into law Tuesday, the medical industry gained something greater than the prospect of adding 32 million Americans to the ranks of the insured — it gained a sense of certainty.

“Hospitals and doctors now know how many more people will be insured, and will be able to calculate how much and what kind of new space they will need to meet the historic surge in demand,” says Jeffrey Cooper, executive managing director of Savills US, who works in the London-based company's New York office.

A real estate formula for calculating medical space holds that a health care system requires about 1.9 sq. ft. of medical office space per patient, according to Cooper. With reform, 32 million people are being added to the ranks of the insured, which equates to the potential demand for 64 million sq. ft. of additional medical space.

Demand for space, however, will be constrained by the supply of health care providers, according to Robert Bach, chief economist for Santa Ana, Calif.-based Grubb & Ellis. “Do we have enough doctors, nurses and other professionals to accommodate the rising demand? Over time, we will see greater demand for health care facilities, but the rate of increase will be constrained by how quickly schools can ramp up the supply of health care professionals.”

Another, perhaps negative, bit of certainty that has emerged with reform is that hospitals and doctors will receive lower reimbursements for their services over time.

“Long-term I think the weaker hospitals and hospital systems are going to suffer because reimbursements are going to come down, and my guess is you’ll see some consolidation,” Cooper says. Consolidation would mean that some hospital campuses would likely close and others would experience increased demand for space.

Most hospital systems today provide 60% of their treatments on an inpatient basis and 40% as ambulatory care, or outpatient treatments. But that ratio is changing. “Hospitals believe that over the next five years, those percentages are going to be reversed,” he says.

Over the past five years, the Savills medical real estate team has advised on almost $2.5 billion in medical real estate transactions for developers, public and private real estate investment trusts, pension funds and private equity investors affiliated with 30 top health care systems.

The firm is now expanding its medical office team to add expertise in helping hospitals monetize their existing facilities through sale-leasebacks and other joint ventures.

Without health care reform, however, demographic trends were already supporting the medical office sector, notes Alan Pontius, managing director of the healthcare real estate group at Marcus & Millichap Real Estate Investment Services, in the firm’s San Francisco office. He contends that reform only makes a good thing even better.

While reform may have bolstered demand for space, investment principles for the health care sector won’t change. “I don’t think spec development in medical office is the right thing to do,” Pontius maintains. “We’ve seen a lot of this spec development fail in the past 24 months. And the impact of this health care reform isn’t going to show up overnight anyway.”

But with all of the new-found certainty, there’s still a lot of uncertainty over how health care reform will shift the overall economy, which drives demand for all types of commercial real estate.

If some employers choose to curtail hiring because of increased costs associated with the new mandates, that could reduce demand for commercial real estate space.

“Companies that already provide health insurance, especially small companies, may be able to get better rates through the pools that are going to be set up. So theoretically, they would hire more employees if their insurance costs go down,” says Bach. “I’m not sure how these two effects balance out.”

An ACRES Real Estate Services, Inc. Company