November 17, 2021

Western Real Estate Businiess

Five 'P's Impacting Behavioral Health Real Estate

John Pollock

As treatment for behavioral health conditions - mental health conditions and substance abuse disorders - becomes more widely accepted and acknowledged by payors, the real estate industry will continue to see requirements from healthcare systems to meet the demand for this coverage. There have been five predominant factors impacting behavioral health over the past 15 years, making it one of the most interesting sectors in healthcare real estate.

1. Parity

Congress passed the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act (MHPAEA) in 2008, which ensures equal coverage for treatment of mental illness and addiction. It took the federal government another five years to pass rules for i1nplementation. Prior to 2013, mental health treatment was covered at far lower levels than physical illnesses. ow, nearly all major healthcare plans offer equal coverage for behavioral health treatments. There are also dedicated watchdog groups like the National Alliance on Mental Illness that ensure payors are providing the mandated care. More coverage means more demand for physical space, and many of the real estate requirements we're seeing are for outpatient locations where treatment is more appropriate and cost effective.

2. Perception

Unfortunately, a lot of people think about Jack Nicholson's Oscar-winning performance in One Flew Over the Cuckoo's Nest when they think about mental health care. This perception has often been an obstacle for providers to overcome when seeking approval for behavioral healthcare sites. The tide has finally begun to turn, however, now that one in four Americans is impacted by a behavioral health condition and there is greater awareness or the critical need for this type of care. The stigma around behavioral healthcare is beginning to crumble, making site approvals easier to acquire and resulting in more and more facilities being built.

3. Private Equity

An article in Behavioral Health Business entitled “Private Equity to Fuel Behavioral M&A” (Jan. 29, 2021) suggests the industry could see a peak in mergers and acquisitions activity in 2021. There were 85 deals in 2019 and 97 in 2020, with private equity players accounting for the lion’s share of activity. This activity is centered around lower capital- intensive models of care, such as autism providers, outpatient mental health, medication-assisted treatment (MAT) organizations and opioid treatment programs (OPTs). The mergers and acquisitions are creating consolidation to a still-fragmented industry. Real estate landlords and developers are rejoicing since these larger organizations have the financial heft to support renovated and/or new facilities.

4. Public REITs

Public REITs are beginning to recognize the opportunities in this emerging sector. Sabra Health, Care REIT was considered "pioneering" in 2019 when it made its early investments in behavioral health real estate. In June of this year, Medical Properties Trust announced a $950 million investment into a behavioral health platform that includes real estate and an interest in the operating company. The reported yields on the Medical Property Trust acquisition are attractive and will surely get more institutional capital interested in the space.

5. Pandemic

Over the past 18months, the COVID-19 pandemic has lit the fuse on demand for behavioral health services. A March 2021 report by Cigna states that the increase in demand for these services has jumped to 27 percent. Celebrities have opened the door by speaking publicly about mental health on various platforms, helping to bring the discussion front and center. After more than a year of quarantines, unemployment stress, and a lack of social activity, more people are seeking help - and providers are looking to expand their real estate footprint to provide it.

These are just a few of the many reasons behavioral health is gaining momentum when it comes to healthcare real estate. Federal support, public acceptance, private and public funding and a pandemic that has rocked our world have led to a greater demand for these services that many developers are eager to provide. Meridian, for example, is continuing to look for ground-up development opportunities (often assembling multiple parcels) and repurposing buildings to provide state-of-the-art medical office space that results in greater access to care and enhances the patient experience.

- John Pollock, CEO, Meridian in Walnut Creek, Calif.