November 1, 2018
Connect Healthcare returned to Southern California in 2018 for a conference that attracted more than 250 to The Resort at Pelican Hill in Orange County. The power-packed line-up of speakers for the October 29 and 30 event delivered deep insights into an evolving space.
Healthcare real estate’s most active players nationally, as well as providers and hospital systems, addressed the industry’s most pressing topics. Five panels explored the state of the capital markets, technology trends propelling the industry forward, behavioral health facilities, and mixed-use space. We will be sharing deeper dives on all five panels in a special Connect Healthcare newsletter next week. In the meantime, here are a few of the highlights from the discussions.
The general consensus from the discussions was that there are plenty of opportunities within the healthcare real estate space, and a wealth of capital pursuing deals. High demand and a coming silver tsunami are driving the robust activity, yet challenges the industry must address include regulations, and vastly diverse strategies across the product spectrum. All of which must be weighed against shifts in demographics, integration into new retail settings and consumer preferences for convenience.
A panel titled, Market on Fire: The New Generation of MOB’s, Mixed-Use Facilities & More explored the market’s robust development pipeline and flood of investment, which has pushed the red-hot MOB sector toward record growth and expansion. Growth drivers, project types for new delivery models, investment options and unlocking value were covered by the panel (pictured).
- Stockdale Capital’s Andrew Saba, noted the new Opportunity Zones may present options for development, especially outside of California, though it may take some time for everyone to figure out how it works and structure a deal.
- Sudweeks Development & Investment Company’s Brandon Sudweeks says a development trend he is seeing are facilities expanding from 4,000 and 5,000 square feet to 45,000-square-foot, primarily as a result of operators being paid by the number of rooms. Facilities that may have had eight rooms, now may have nearly 50.
- Blueprint HCRE’s Jacob Gehl says he’s seeing competition in the seniors sector to repurpose old tired assisted living facilities, some even serving as housing shelters for the homeless.
- Hobbs+Black Architects’ John Barker notes they are seeing a shift to larger physician’s groups and big clinics.
- CareTrust REIT’s Mark Lamb noted the transient care model is changing to favor taking care of patient’s needs quickly and discharging them to lower care facilities, and out of an acute care setting. The goal is focused on becoming a one-stop solution.
A presentation on Bold Ideas and Innovations Transforming Healthcare offered a few new ideas and innovations in design, telemedicine, amenities, sustainability and wellness.
- Monarch Senior Living’s Frank Haffner says there’s been convergence in terms of the customer service model that has been disrupted as a result of the need for a high level of care.
- Dignity Health’s Jeffrey W. Land noted that the healthcare platform itself is on fire. One of the things they are exploring is home-based acute care, noting a JV it is doing with Contessa involving home surgeries.
- Silverado Senior Housing’s Paul Mullin shared that the silver tsunami is building with a huge increase anticipation to arrive in the next three to five years. He says there’s not enough memory care beds, nor is there sufficient MOB’s with infusion clinics to meet the need for preventative measures. These are “interesting challenges” that the industry “better get on it.”
- Medicus Property Group’s George Scopetta shared one of the more intriguing ideas in the form of a WeWork for doctors concept. They build and furnish the facilities with all a doctor needs to see, and treat patients cost efficiently. This is anticipated to allow a doctor to have multiple “offices” and bring healthcare to patients.
- Catalyst’s Debbie Jacobs says the seniors segment of the industry is “fast growing” due to population growth. It is expected to double in size in California by 2040, with 10 million seniors in the state. The reality is that more beds are needed, yet the industry struggles to meet the need today in terms of physicians and facilities.
- Anthem Memory Care’s Isaac Scott says they are shifting to incorporate more clinics, including “bringing back clinics into communities.”
A panel titled REITs, Private Equity, and Foreign Capital Shaking Up the Market delved into what’s behind the significant increase in the amount of capital from those investment sources. This influx has had a profound effect on the industry, shifting the the flow of capital to specific property types as investors adjust risk levels and investment strategies accordingly.
- Cushman & Wakefield’s Travis Ives believes that some of the shifts to healthcare are tied to a “defensive strategy,” as investors move away from multifamily or industrial to MOB due to the stability of it.
- CBRE’s Shane Seitz noted that in 2017 the buyers were public REITs, but in 2018 so far, they’ve been selective, typically making moves only if it fits their story and message in the market. “Institutional capital has stepped up in 2018,” says Seitz. And, another source that’s picked up the slack has been foreign capital, though it has tended to buy into funds that are making investments.
- Capital One’s Natalie Sproull noted that they are seeing some more competition into the healthcare space, in particular from banks. A trend she is seeing are the traditional MOB model has shifted to a more hybrid model.
- LTC’s Clint Malin says they view acquisitions from today’s price point with the capital available and try to determine what the opportunity is at the entry point. Then they look down the road to try to see what the deal looks like if they need to refinance, and how it will affect cap rates and valuations.
- American Healthcare Investors’ Stefan Oh notes the recent stock market volatility has generally attracted investors to a “flight to safety,” which tends to benefit healthcare REIT’s. He pointed out, when there’s volatility, investors look to protect their investments. Though on the acquisitions side, they are proceeding selectively, yet have been helped somewhat by public REIT’s disappearance. He says private equity players have moved to fill some of that void. Today, operators want to manage not own facilities.
- Sabra Healthcare REIT’s Talya Nevo-Hacohen pointed out that they do look at development deals, though lately deals typically haven’t “smelled well in my view,” which could be the sponsor was lacking, or they were looking for unrealistic margins of 50%. The timing of development is critical, and given the oversupply and high construction costs, she doesn’t think “it is a good time to develop.” It would likely only be in a specific market, with competitive advantage such as low land basis or other attributes.
For our panel titled Crisis Management: Surging Demand for Behavioral Health, experts explored why behavioral hospitals have emerged as one of the fastest-growing types of healthcare facilities with major REITs and healthcare systems competing to create new facilities. Leading experts including Behavioral Health Association of Providers’ Andrew Martin, architect Anthony Pings and Watch Hill Capital’s David Lebowitz discussed the opportunities and challenges facing a burgeoning sector. Among the challenges shared were the diversity among the types of facilities, which may present a wide range of regulations or lack of regulation. The dire need for more facilities is being met with the harsh realities of a complex system and broad spectrum of patient needs, all of which presents numerous challenges to those seeking to develop.
The final panel of the day was titled The Convergence of Retail & Healthcare: Sky’s The Limit. The conversation focused on “retailization” of healthcare, a trend that continues with no signs of waning. That often means pharmacies, grocery stores, and drugstores ramping up real estate strategies to include urgent care, wellness centers, and full-service medical clinics. The conversation explored opportunities and challenges that lie ahead in the next phase of the retailization of healthcare.
- Cox Castle Nicholson’s Andrew Fogg pointed out that healthcare users seeking to go into retail sites need to watch if it is an anchor site integrated into a regional mall or a freestanding building, since each present unique opportunities and challenges. He advises closely examining the CC&R’s and restrictions. A mall anchor with priority voting rights could cause problems if they take exception to a new healthcare use.
- Fresenius Kidney Care consultant Brian Galligan notes they are interested in retail settings, though not typically the “Rodeo Drive type of site, but one that is out in the community where patients are,” typically lower to mid-level centers. Smaller retail strip centers are “ideal,” he says.
- JLL’s Bryan Lewitt noted at a recent ICSC retail conference one of the takeaways was that “healthcare is the new retail.” Today, roughly 10% of space in retail environments is occupied by healthcare users, and that figure is expected to grow to 20% in the next five to seven years. That trend is mainly being driven by hospitals needing to be out in the communities. He pointed out that healthcare users are at somewhat of a disadvantage though due to the slow-moving process they typically follow. In the race for space, healthcare users usually lose, he notes.
- Meridian Property Company’s Mike Conn agrees they are seeing opportunities for lower acuity occupiers. That includes outpatient facilities that offer better access at a lower cost, which can work if the infrastructure and parking is in place. The retail landlord must also understand what kind of deal they are getting into with a healthcare user. They could find out down the road that regulations require the entire 50,000-square-foot facility needs to be sprinklered, not just the 10,000 square feet the healthcare tenant is taking. An upside to healthcare occupiers is they tend to be “sticky tenants,” because they have to make specialized improvements that are costly, and it can be hard to move to a different location due to license restrictions.
For comments, questions or concerns, please contact Dennis Kaiser