Developing Healthcare

Hospital executives need look no further than Massachusetts’s healthcare reform to see a potential future for healthcare real estate development.

Randyl Drummer reported in a 2009 CoStar article that from 2006-2009, as a direct correlation to healthcare reform, an additional 1.8 million square feet of new medical office space has been developed and absorbed in Massachusetts;  a 14%  overall increase.

It stands to reason that an increase in healthcare availability will require supplemental medical real estate construction. Medical real estate development has boomed in Massachusetts’s contrary to national trends. Furthermore, CoStar reported that national medical office building space construction peaked at 19.5 million square feet in the last part of 2006, yet plummeted to 6.7 million in the first quarter of 2009.

Massachusetts, as a model, clearly demonstrates the demand for new medical real estate development is eminent yet the actualization of satisfying the demand is less straightforward.

Reasonable experts postulate that healthcare reform will drive an estimated 9 million new patients into the healthcare system. I would agree, that adjusting for socio-economic variables, this is a reasonable assumption. Other experts estimate that for each patient entering the healthcare system 2 square feet of additional medical office space will be required, or 18 million square feet total.

I respectfully disagree. The delivery method in the future may become more driven by the quality of physical space not quantity.

Accountable Care Organizations “responsible for patients across a continuum of care, including preventative, primary, specialty, emergency, acute and post-acute care” (see Common Wealth Fund Blog) encourage coordinated health care delivery.

Conceptually, ACOs will pivot from multidimensional off campus outpatient clinics. Relocating hospital resources proximal to the local community is the cost effective delivery system suggested by ACOs. The intent being that diversification to community centers, providing a wide range of services, will dramatically reduce inpatient stay and emergency room visits making hospitals more efficient and profitable.

These types of medical real estate ventures are less costly than developing new on campus facilities; however, on campus facilities will never lose their intrinsic value to the immediacy necessary for specific practices. Additionally, Cushman & Wakefield reported in their 2010 Medical Office Building Investor Survey that outpatient centers constitute the most significant increase in healthcare real estate development.

It is my contention that one of the continuing trends in healthcare real estate will not only be development of new community outpatient centers,  but also the purchase, retrofit, and  remolding of strategically located existing facilities.

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