What is Healthcare Real Estate?

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What is Healthcare Real Estate?

It is everything but the Hospital. The Hospital building as real estate is not worth much. The Hospital building is really an over improved piece of technology with four walls and a roof that must operate within strict licensure guidelines. Among other things the Hospital building requires an engineering focus. This is a FACILITY that needs to operate 24 hours a day, seven days a week. It is not real estate.

A Hospital might cost $700 / SF to build and as a vacant building is worth in the $ 20/SF to $ 40/SF range. The skill required to oversee the Hospital building operations usually falls to someone with a title of Vice President of Facilities. This person understands licensure and how the chillers work but they often do not possess the skills needed in today’s fast paced world of healthcare real estate. In the past these facility leaders have often been the ones responsible for real estate activities. Since real estate was never a core competency, Health Systems have often been taken advantage of by third party developers and real estate brokers who do not understand the business. They have entered into many one sided transactions. The appropriate documentation needed for compliance with Stark laws has often been ignored. Rarely is there an effective lease administration system where all the leases have been inventoried and abstracted properly. Operating costs within the Hospitals leased or owned properties are frequently out of control or difficult to document. Hospitals who manage their own Medical Office Buildings often do a poor job. One reason is that their focus, as it should be, is Hospital first, Medical Office Building second. The Vice President of Facilities often engages real estate brokers that have no understanding of the business of healthcare. The financial acumen to enter into complex lease negotiations as well as design and build complex healthcare spaces “ in the real estate world” is often missing. Many mistakes are often made.

Due to the affordable care act, significant decreases in expenses will need to occur in order to survive. Health Systems as well as physician practices will need to grow in both geography and size. As they do they will need to cut out layers of expenses. The Health Systems will need to “ shrink the footprint” of their acute care hospitals while increasing their presence in the community. This means they will need to grow in the “ real real estate world”. This creates the need for excellence in healthcare real estate. We have found that the key ingredients to success in this arena are first a financial understanding of the business of healthcare. This must be coupled with significant expertise in real estate and finance. Someone who can understand the business needs of the Hospital and translate that into a real estate and finance solution is indeed a unique and valuable person. As Health Systems and/or physician practices combine the integration opportunities within their real estate portfolio are going to be very significant. There will be opportunities for millions of dollars of annual expense savings or growth in new real estate revenue opportunities. The mistakes of the past will create significant opportunities for tomorrow.

Health Realty Advisors Inc. is on the front lines leading the integration opportunities that exist within a Health System or physician practice medical office portfolio. In this, our introductory newsletter, we thought we would leave you with our top ten list regarding the future of healthcare real estate. Health Systems and Physician Groups will need to step up their game in this area. The results will be significant. You may not agree with our list but we believe it to certainly be informative.

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