Health systems eye real estate moves in post-pandemic world

Healthcare systems facing economic headwinds and the aftermath of the pandemic are taking a closer look at whether to divest or extract more value from their real estate holdings.

Why is this important: Real estate can represent up to 40% of a health system’s balance sheet and also represents a significant portion of the commercial real estate stock of some communities.

The big picture: Inflation continues to drive up the costs of just about everything. With the threat of a recession, bond markets are drying up and cash is scarce.

• “Healthcare organizations are absolutely pulling capital out and being very, very cautious,” Eric Jordahl, chief executive of Kaufman Hall, told Axios.
• “Access to capital for most organizations has become limited. So a lot of them are backing off, postponing, pushing things down the road trying to manage with a tighter capital budget,” Jordahl said.

State of play: Work-from-home policies and continued use of virtual care are forcing accountability.

• “It’s very common for healthcare systems to say they’re planning a 50% reduction in their administrative space requirements. That’s a huge reduction,” said Jay Johnson, chief executive of JLL, a commercial real estate company. who wrote a recent health report. care real estate trends.
• They seek to get creative, for example by renegotiating deals with landlords for less square footage over a longer rental period or identifying underutilized clinical space and mothballing it or reallocating it to more productive uses, Johnson said.
• Penn Medicine recently determined that only 10% of its 600,000 square feet of administrative space is in use, health system real estate expert Allison Wilson-Maher said at a recent event hosted by Bisnow.
• “That’s a lot of space not to be used. So we are recycling 300,000 square feet for a different use because we own it. And the remaining 300,000 square feet, we’ll probably give up and go somewhere to shore up a much smaller footprint,” Wilson-Maher said, according to Bisnow.

Yes, but: On the clinical side, there’s closer to a 15% to 20% reduction in space for many healthcare systems, Johnson said.

• The surge in telehealth is also dampening the demand for medical office space, especially in less severe facilities like urgent care centers, experts say.
• But it’s still unclear what long-term impact telehealth will have on in-person volumes. The growing aging population may offset some of the reduced clinical space requirements, Johnson said.

The plot: In my years of reporting on hospitals, nothing can piss people off more than talking about parking. But demand is actually still much lower than it was before the pandemic, Johnson said.

• “It’s always a problem, but who’s parking, right? It’s the patients and the staff. And a lot of hospitals have cut their administrative staff sharply. [working] in their hospitals and that freed up places,” Johnson said.

Be smart: It’s clear the pandemic has changed the way many healthcare systems thought about how they wanted to use their space, said Lisa Goldstein, senior vice president at Kaufman Hall.

• “We’ve seen many organizations put a pause on strategic capital and go back to the drawing board and reevaluate,” Goldstein said. “Construction costs are rising. How many beds do we really need? Do we need more or less based on what we’ve learned?”
• For example, South Dakota-based Sanford Health announced in August that it had suspended a Minnesota hospital project, citing uncertain times.
• Carilion Health also postponed construction of a major new mental health care facility in Roanoke, Va., citing negative financial impacts of the pandemic, the Roanoke Times reported.
• In July, Provident Health suspended an eight-story construction project in Cook County, Illinois, due to soaring costs, officials said they would re-evaluate plans.

The bottom line: We often think of health systems as important employers in a community or essential service providers.

• But the pandemic and the economy show how potentially they can fluctuate property prices or dampen business development.