Politics Or Not, Developers Think Healthcare Real Estate Is A CRE Blue Chip
When it comes to healthcare real estate, legislative threats and significant technological advancement has this sector of CRE optimistically on guard.
Soaring insurance costs, the volatility of the Affordable Care Act and continued efforts to chip away at it has fostered interest in moving healthcare treatments to lower-cost ambulatory care centers. But even if the political future of healthcare is murky, developers view the sector as a blue-chip industry due to growing health interests and needs spanning generations.
“Physicians don’t want to deal with insurance,” Princeton International Properties Corp. President and CEO David Tawfik said. “They would rather be practicing and have someone else handle the business.”
Tawfik’s company has noticed the trend of smaller medical practices consistently getting eaten up by bigger practices and hospitals. Princeton International owns a building at 650 First Ave. where it has seen many physician tenants who were affiliated with New York University simply sell their practices to NYU.
Tawfik blames the trend on both insurance companies and healthcare reform, which he said are interconnected and driving one another’s costs sky high. In other instances, he notices the threat of changes to healthcare has slowed down some deals.
“Folks are sitting on the sidelines,” Tawfik said. “Nobody comes out and says it directly, but I think it has to be it.”
Today’s political climate in Washington is chaotic. Politics, as it pertains to healthcare, is what some could call insane, repeatedly attempting the same action with the hope of a different result. Republicans have failed at multiple efforts to both repeal the Affordable Care Act and replace it with their own reform. President Donald Trump signed an executive order in early October to strip Affordable Care Act subsidies for low-income individuals, but bipartisan support is growing to restore the subsidies and stabilize rising costs.
“It’s an obvious concern if you don’t know if current legislation is going to stay or if there will be changes to the Affordable Care Act,” Tawfik said.
But others do not think further healthcare reform, if it were to ever pass, would drastically impact the surge in ambulatory care and “retailization” of where people get treated by a doctor.
“Whatever does happen in Washington regarding healthcare legislation, it’s unlikely to ultimately diminish the migration of healthcare delivery to outpatient settings like 156 Williams St. and other medical office buildings,” LaSalle Investment Management Managing Director Steve Bolen said.
Bolen’s firm has invested close to $2B in the medical office sector and is in the middle of a medical conversion of a 1950s-era office building in Lower Manhattan at 156 William across from New York-Presbyterian Lower Manhattan Hospital.
The building was 66% leased when LaSalle made the decision to invest with its JV partner, the William Macklowe Organization, in the property in 2015. Since adding several medical tenants from the beginning of the conversion, the building’s occupancy rate has increased to 96%.
“What drove our investment in this particular project was its proximity to what is now the only full-service acute care hospital south of 14th Street, substantial population growth in Lower Manhattan and the scarcity of Class-A medical office product in the submarket,” Bolen said. “The shift to ambulatory care and the need to deliver care in low-cost settings continue to be the primary drivers of demand for medical office space.”
Improved technology in healthcare enables many treatments and even surgical procedures to be offered away from a central hospital in an effective manner. These lower-acuity, off-site centers provide care at drastically lower costs. Inpatient admission costs average nearly seven times the price of outpatient care, according to the Health Care Cost Institute.
“This retailization of medicine and the repurposing of alternative real estate into medical space is drawing significant interest from investors as healthcare real estate is now a recognized asset class,” The Corcoran Group’s Wexler Healthcare Properties Team Associate Broker Paul Wexler said.
Changing demographics and interests are also a boon to healthcare real estate. The sizable number of aging baby boomers presents a demand for more healthcare facilities as the generation matures into the years when doctor visits become more frequent. Even millennials are fueling demand, as the younger generation places more emphasis on preventive healthcare and wellness.
“The combination of aging baby boomers, millennials’ interest in preventative healthcare and wellness and rapidly evolving healthcare technology provide a solid foundation for the entire industry,” Wexler said.