By Kevan McCormack
Anyone who doubts that healthcare has played a role in the stability of the commercial real estate markets has not been paying attention. In a relatively short period of time, healthcare has become an accepted asset class for many in commercial real estate; if a bank does not have healthcare or senior living lending experience, then they are likely in the process of finding and hiring that experience. No surprise that developers who have experienced recent difficulty financing their retail deals have become healthcare and senior living experts practically overnight.
Those servicing healthcare staffing companies (such as the Delta Cos.) are “upping their game” by moving into new state-of-the-art developments. With an industry-wide record demand for healthcare staff, staffing companies need to impress not only candidates but healthcare clients as well. This investment is a strong signal to the existing strength and coming stability of the healthcare industry.
The movement away from the mega-hospital towards smaller and more strategic micro-hospitals while in-filling with ambulatory surgical facilities seems to be a trend that will persist. Additionally, the trend of shifting Medicare payments away from “fee-for-service” and towards “value based” payment models will continue.
Though initially painful, this shift should be beneficial for the patients, government, taxpayers, and operators in the long-run. The painful parts lie mostly in the logistical, performance tracking, and reporting sides of the business. Everyone must become significantly more sophisticated in their IT and operations. And most importantly, rather than just getting paid for performing a surgery or taking an x-ray, healthcare providers must accept they are getting paid to achieve an outcome. This means they must approach their business from the point of view of efficacy rather than a traditional billing model. This is a good thing in theory – if they can do less work and get better outcomes, then that is what they should do as they will make more money. Novel concept, right?
But, most good things have their challenges too. Although most will agree that the repeal of the Affordable Care Act is perhaps imminent, the fact that this has not been completed yet by Congress causes some uncertainty. While cap rates have been stable over the last year or two, there may be a slight uptick this year due primarily to macro-economic factors of an increasing interest rate environment. However, there is almost $15 billion of equity allocated to the development of healthcare real estate and investment during 2017 representing a substantial increase over the last several years. What remains a question is how healthcare operators will react to the upcoming changes in the FASB Accounting rules, and how that will impact their strategic corporate decisions: will the trend towards leasing their real estate continue, or will healthcare systems change course and trend more towards owner-operators for their real estate?
We don’t know, but it will be interesting to observe in the coming months.
Metropolitan Capital Advisors has a unique track-record in financing healthcare and senior living related projects for over 25 years. The next time you have a healthcare or senior living financing requirement, reach out to Kevan McCormack at [email protected]
The author, Kevan McCormack, is a Senior Director in the Dallas office of Metropolitan Capital Advisors.