In the Know: 2020 Revista Medical Real Estate Investment Forum

We look forward to Revista’s annual conference every year and, once again, this year did not disappoint. First, this year’s conference was held at the PGA National Resort and Spa in gorgeous Palm Beach Gardens, Florida, which gave us the opportunity to take in some amazing sites and scenery. The conference itself was three days jam packed with informative executive sessions, a data trendbar and tons of networking. Meridian’s CEO, John Pollock, had the opportunity to participate in the panel discussion entitled Investing Off the Beaten Path, and Meridian Executive Vice President, Mike Conn was in attendance as well. In this post, we’ll provide a few of our key takeaways from the event.

Medical Real Estate Facts, Trends & Top Markets 2020

In the opening session, Mike Hargrave and Hilda Martin, Principals at Revista, kicked off the conference with a session that provided an outlook on the industry driven by data.

Medical office buildings (MOB) and outpatient clinics now account for 36,433 properties in the United States and have an estimated value of $420 billion. Added together with acute care facilities, the value of the physical space that makes up healthcare real estate is $1 trillion. Ownership distribution continues to be dominated by the hospitals and health systems themselves and breaks down as follows:

  • Hospitals / Health Systems 52%
  • Provider / Govt / Other 13%
  • Investor / Private 24%
  • REIT 11%

MOB inventory is growing again and this time it’s with larger buildings with averages trending above 50,000 SF for new buildings. Construction of new MOBs peaked in 2008 at 35M SF. 2019 will be just under 25M SF and 2020 could be above 30M SF.

The top 50 metros in the United States report strong absorption and stable occupancy:

  • Occupancy is at 91% and has hovered around this level for over the past 6 quarters.
  • Absorption stayed around 2-3M SF per quarter until a spike in the 4th quarter of 2019.
  • Completions add up to between 5-8M SF / quarter.
  • Rent growth since 2017 has stayed between 2.1 – 2.4% per annum but dropped to 1.8% in the 4th quarter of 2019.
  • Occupancy is higher in coastal markets, sitting closer to the mid-90s
    • Ironically, rent growth in the coastal markets is slower, which is counterintuitive and does not appear to be correlated with occupancy. One possible explanation is that there is more activity in markets with lower occupancy and as a result, you see more marketing and/or price transparency.
  • MOB pricing remains strong on lower sales volumes.
  • REITs gained market share in 2019 and grew their share of the activity (buying) to 33% from 19% in the year before. Private equity still dominates but slipped a percentage in 2019.

Hilda went on to discuss construction starts and reported that 2019 was the biggest year in outpatient starts since Revista started tracking. She pointed out some other interesting stats:

  • New projects are overwhelmingly hospital affiliated (71%) and much of the activity is off campus (70%).
  • We continue to see a lot of repurposing retail stores and there is a wide array of project types ranging from a light refresh to a total rebuild.
  • There are a lot of old hospitals that will need to be repurposed including labs, outpatient facilities and seniors housing.
  • In 2019, construction starts planned to be > 100K SF = 77. Historically that averaged 50 / year, which is evidence that buildings are becoming larger.
  • The newer, bigger MOBs have complementary services and are acting more and more as a “one stop shop” including lab work, urgent care, pharmacy, primary care, woman’s care, etc. This makes the patient experience better and enhances the brand.
  • Hospital outpatient visits are down for the first time in 35 years.
  • Urgent care visits are going up quickly and 70% of those clinics are independent. Most of the patients don’t have a primary care physician where are they being referred.

Other Hot Topics

There is still an abundance of capital flooding into the space. Equity wants healthcare in their portfolio, and there is a need for sophisticated operators. Providers are updating their 10-year capital strategy plans more often due to the pace of change and the effects of technology, sometimes yearly to keep up with the pace of change. Systems are reviewing their strategies on whether they should self-develop and own vs. lease with the use of 3rd party capital.

Panelists talked about the viability of micro-hospitals, or neighborhood hospitals, and whether this strategy aligns with the goal to reduce the overall cost of care. Operators are often accused of cherry-picking cases and charging hospital reimbursement rates when care could be handled in an outpatient setting at a much lower cost. Patients are now being thought of as “healthcare services consumers”. They want location and convenience in their urgent care facilities, and one-stop shops in their multi-specialty MOB’s. Providers are trending toward developing more outpatient services, although historically, primary care services aren’t profitable. Acute care is often much more profitable, and the hope is that ambulatory sites can feed revenue into higher acuity specialty service lines.

Providers are going all in on digital health. This will compete against urgent care facilities. Providers are exploring centralized tele-centers vs. distributed clinic networks. They are investing in startup tech companies, or in some cases writing their own code/apps when start-up ventures/technology don’t exist yet. Behavioral Health is still a priority but is facing city zoning and local population push-back.

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Authors: John Pollock and Mike Conn