Preparedness: Ensuring the fitness of healthcare tenants

Ben Reinberg

The state of the healthcare sector is, well, healthy. It was strong before COVID-19, it’s been alive and well during the pandemic, and there’s no reason to think it won’t be resilient for years to come. But for commercial real estate investors working in this space, healthcare real estate isn’t all created equal.

First, why is healthcare real estate in general a good buy? One word: demand. An aging population in the US – with approximately 10,000 baby boomers turning 65 every day – means more visits to the doctor. According to a recent analysis by Deloitte, global healthcare spending is expected to grow at an average annual rate of 3.9 percent through 2024.

With the growing demand, there has also been a diversification of healthcare property typologies. Hospital campuses are going nowhere, but more and more providers are establishing themselves in Main Street locations that are cheaper and closer to patients. The move to lower-cost outpatient facilities in established retail corridors has led to fierce competition for residential real estate.

While healthcare real estate fundamentals are strong, a commercial real estate investor must consider a number of factors when considering acquiring a medtail property, many of which are leased to a single tenant on a net rental basis. Among other things: How much has the provider invested in the property? How long do they stay there as part of their lease? What kind of services do they provide? Not all medical service providers are equally represented in the due diligence process.

dialysis centers a safe bet

Dialysis clinics were one of the first precursors to the medtail movement. Two factors — the country’s aging population and patients’ desire for home care — have long made this an attractive asset class.

A disruptor in this sector is the advent of home kidney care. According to the US Renal Data System annual data report, 6.8 percent of new dialysis patients were treated at home in 2009, but that number rose to 12.6 percent by 2019. That’s 10 years of growth before COVID, and the trend likely only skyrocketed during the pandemic, with immunocompromised patients reluctant to seek treatment at a community dialysis center.

The leading dialysis providers are well aware of this trend. DaVita, the country’s second-largest dialysis provider, has signaled a shift from dialysis-only services to integrated kidney care care, embarking on a digital transformation to offer telemedicine consultation services from its centers. Meanwhile, Fresenius Health Partners, the biggest player in the industry, is about to get a lot bigger after a $2.4 billion merger with Cricket Health and InterWell Health.

The dialysis center landscape may look different in 10 or 20 years, but these facilities will remain ubiquitous in neighborhood retail environments, making them a safe bet for investors — particularly those with a long-term creditworthy tenant.

Specialty centers with high demand

There is a spectrum of medical specialists who once manned offices in major hospitals but, thanks to advances in technology, are now offering these services off campus. Ear, nose and throat doctors, cardiologists and gastroenterologists are just a few examples of providers who are getting closer to their patients.

Because of the permits required to operate a healthcare facility, as well as the high investments doctors make in equipment that is difficult to move, these medical buildings are desirable assets with high barriers to entry.

Investors should target high-growth markets where there are few comparable assets. This gives them more bargaining power when it comes to contract renewals, as providers are less likely to leave if it means moving further from their patient base. Providers whose clinics have a high need for customization and expansion are particularly attractive as tenants. Because a move not only threatens to disrupt operations, but also becomes a major cost factor that makes rent increases in existing properties more palatable.

Real estate specialization

Behavioral health is a fast-growing segment of the industry, thanks in part to the gradual destigmatization of mental illness and increased demand due to the COVID-19 pandemic. But from a real estate perspective, it’s not necessarily a foolproof investment.

The fact is, most behavioral health professionals do not have the specific needs of other health professionals. In terms of space usage, they are more like classic office workers than doctors. With the ability to switch more on a whim than other medical providers, they pose a higher risk for an investor who needs to consider how easily they could fill the vacancy should the tenant decide to move out.

Conclusion

Healthcare retailization is a trend that has been playing out for a number of years, but one that seems to be here to stay. With so many diverse medical providers seeking limited spaces within communities, real estate investors have the luxury of being discerning — as they should be, since some healthcare tenants require more specialized treatment than others.

Ben Reinberg is CEO of Alliance consolidated group of companies.

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