Healthcare providers look for ways to make patient care more convenient and cost effective

Healthcare Trends

Commentary by Beth Young

It’s a new year and a fitting time to look ahead. When it comes to healthcare and related real estate, you can expect providers and investors to look for ways to make your healthcare more convenient and cost effective while they are working on efficiency and consolidation.

In 2018, expect to see more of the trends that shaped last year such as more development of new outpatient facilities and little change in cap rates or pricing for MOBs. Further, there will be continued strong demand from investors for healthcare properties, particularly now that institutional and foreign investors have set their sights on the healthcare property sector.

Expansions and ContractionsQ4 2017 Houston Healthcare Market Indicators

Demonstrating the importance of providing healthcare in locations close to the consumer, numerous Houston-area hospitals expanded to the outer submarkets including The Woodlands, Katy, Pearland and Cypress. Although Houston health systems are increasing the size of their footprint on the Houston landscape with new hospitals in major markets, hospitals are reducing the number of beds while expanding other departments. For example, in 2007, Memorial Hermann (Houston’s largest health system over the past ten years) had 10 acute care hospitals and more than 3,000 licensed beds. At the end of 2017, the system had approximately 50% more hospitals and one-third the number of beds. Meanwhile, the population data shows the greater Houston area has increased 20% during that time.

Driven by higher deductibles, better technology and drugs, shrinking reimbursement and patient demand for convenience and lower costs, health systems are incentivized to promote prevention and keep patients with chronic diseases out of the hospital, while providing care throughout Houston’s major markets. Expect to see fewer overnight beds and growth in cardiac surgery, operating rooms, ICU beds and health system sponsored clinics in locations citywide. Some hospitals are using available floors for hospice or rehab space, while others are doing a straight real estate deal, offering the floors for lease. The shift to outpatient care is well underway and accelerating.

Modern Medical Centers

Patients throughout Houston will choose where they go for care based on the customer experience. Retail settings near residential communities may include urgent care, free-standing emergency centers, MOBs, imaging centers, ambulatory surgery centers, oncology care, post-acute care facilities and perhaps senior-care properties. Some larger healthcare systems will provide multiple services in one location near homes, ranging from primary care visits, imaging, cardiology, gastroenterology and orthopedics to entertainment and exercise (to keep patients busy while waiting to see their doctors) and casual dining options in one building.

Not only do successful hospitals and health systems increase their locations, but successful physician groups and specialty services are also following the trend, opening locations in major submarkets around the city. Often, physicians share clinic space with compatible specialists in multiple locations so they can refer business to each other.

Hospital Design

A growing recognition of the need to treat behavioral and mental health (including addiction-management) is resulting in a demand to accommodate cognitively impaired patients more effectively and sensitively. In larger hospitals, emergency departments (ED) are being reconfigured to reduce risk while ensuring compassion and dignity for these patients. Since they often require longer stays in the ED, an emerging design practice is adding features like bathroom showers, storage areas for their belongings and decompression space. Occasionally smaller vacated hospitals are converted into behavioral and mental health treatment facilities and some of these buildings are used for substance abuse clinics for children, teens and adults.

Patients in smaller towns in 19 states are benefitting from micro-hospitals, where they provide services similar to larger hospitals, but on a smaller footprint, often 15,000 to 50,000 square feet with between 5 and 15 inpatient beds.

Another hospital trend is learned from the hospitality industry, says Noe Ramirez, a healthcare architect with RS&H Architects. Besides design changes that include a trend toward soothing interiors, immunocompromised patients, like those needing bone-marrow transplants, need a different type of hospital setting for extended care. After the surgery and Post-Op, these patients are vulnerable to infection and require monitoring for complications, but they don’t need full hospital services. So the new design for this time in a patient’s stay will feel more like a hotel than a hospital, with a more comfortable interior design including some suite-style rooms and possibly a skilled concierge rather than a nurse.

Medical Office

Class A Rent & Vacancy

 Q4 2017 Houston Healthcare Class A

Class B Rent & Vacancy

 

Q4 2017 Houston Healthcare Class B

Nineteen new buildings were added to the list of CoStar’s medical office properties in Houston in 2017. With that expansion came a 0.9% increase in direct vacancy, although sublease space remained at the same 0.3% over the year. In 2016, 495K square feet of medical office space was absorbed, but as of December 2017 only 95K square feet was calculated by CoStar as the net absorption amount for the year. Further, 13 medical office buildings with over 700K square feet were under construction and expected to open in 2018.

Gross lease rates have increased about $1.00/SF in the past year, and net rates have increased about $0.43/SF. During that time, tenants offering sublease space paid attention to the difficulty in finding sublessees and have reduced sublease rates from $22.52 to $20.24 per SF.

Growth of Clinic Size

Because of the trend toward efficiency and consolidation in healthcare, the average clinic has grown in size. An average doctor’s office was perhaps 2,500 square feet (SF) in the past; but now a single physician may lease closer to 5,000 SF. As technology improves, allowing for more outpatient procedures, physicians continue to locate offices with more services that include labs and imaging to provide more convenience for patients near their homes. It’s not unusual for neighborhood clinics to average between 10,000 and 20,000 square feet.

The Effect of Baby Boomers

The growth of the senior population has spurred a new trend: the sale of many of their homes in exchange for apartments in denser urban areas. That presents the need for nearby modern and easily accessible medical offices, often in the form of urgent care facilities. They will be found in mixed-use centers that include a grocery store, retail shops, restaurants and perhaps a movie theatre and/or neighboring residential tower.

Although hospitals are reducing the number of beds due to the growth of outpatient facilities, remaining inpatients will be the sickest and most acute, requiring longer hospital stays. New designs will provide more private rooms and fewer shared rooms.

Investors and developers expect the senior housing sector to grow this year. Most aging baby boomers are still active in the workplace, but demand is expected to increase in the coming years which will encourage investors to add more senior living assets to their portfolios.

Healthcare Property Investments

Healthcare has changed from being an opportunistic investment to being a core investment. Most private investors and REITs hope to acquire off-market transactions. However, when it comes to dispositions of their own properties, investors prefer to use qualified brokers to fully market a property, saying they want to set up the competitive environment knowing they will usually achieve a better sale prices.

Healthcare real estate is still considered less expensive than some of the other asset types, but that is changing. Quality assets are very competitive. Value-add properties attract fewer investors because of the expertise, or disposition that is required to be successful.

Notable Houston Healthcare Property Sales

SECOND HALF 2017

Property

Size (SF)

Sale Price

Sale Date

Advanced Diagnostics Hospital and Clinic

12950 East Freeway

23,300

$17.5M

November 2017

Red Oak Professional Building

17320 Red Oak Dr

40,315

$2.3M

October 2017

Biolife Plasma

13320 Richmond

14,654

Undisclosed

N/A

St. Joseph Professional Building

2000 Crawford

138,586

Undisclosed

October 2017

Sugar Land Medical Pavilion

79,629

Undisclosed

N/A

Clear Lake I & II

132,800

Undisclosed

August 2017

Steeplechase Corner Professional Bldg

11301 Fallbrook

61,866

Undisclosed

August 2017

                                                                                                                                   

 

Houston MSA Health Care

128 Hospitals
18,681 Hospital Beds
16,070 Licensed Physicians
299,600 Health Care & Social Assistance Jobs
3.9% Annual Employment Growth

Texas Medical Center

  1. World’s Largest Medical Complex (1,300 Acres)
  2. 54 Member Institutions
  3. 10M Patients Annually
  4. 106,000 Employees
  5. 5,000 Physicians
  6. 49,000 Life Science Students
  7. $960 Million in Charity Care

 

 

 

 
 
           

Texas Medical Center Update

When talking about healthcare property in Houston, we must provide an update of what is happening at the Texas Medical Center (TMC), the largest medical complex in the world. It is the eighthlargest business district in the U.S. and continues to expand like an island built on an active volcano. In the last year, a new word has been used to describe what is happening in the TMC – collabitition. As the CEO of the TMC has told audiences recently, the institutional leaders of the TMC are now collaborating to compete with international medical centers rather than with each other. Three billion dollars in construction projects are underway and there is a clear passion about the determination to drive the next generation of life science advancements from Houston. The goal is to become the world leader by leveraging the collective power of TMC’s renowned institutions in a shared, centrally managed environment. The result will be a research collaborative unlike anything healthcare has ever seen. With 1,345 total acres and $25B in GDP, the TMC continues to expand, renovate and develop healthcare space for new accelerator programs that will drive innovation. Projects include incubation space to accelerate technology commercialization and a research park to co-locate early-stage companies alongside pharma, biotech and venture capital. In addition, a new 25-story, 550K square foot healthcare tower will break ground in the second or third quarter of 2018.

A major addition adjacent to the Texas Medical Center is planned by Medistar, scheduled to break ground in the second half of 2018. More details will be coming, but expect 32,000-SF floor plates in approximately 550,000 total SF with an oversized parking garage and retail at grade level.

 

Texas Medical Center Member Institutions

Baylor College of Medicine
CHI St. Luke’s Health
Children’s Memorial Hermann
City of Houston Department of Health and Human Services
Coleman HCC College for Health Services
DePelchin Children’s Center
Gulf Coast Regional Blood Center
Harris County Institute of Forensic Sciences
Harris County Medical Society
Harris County Public Health and Environmental Services
Harris Health System
Health Science Center Texas A&M University
Houston Academy of Medicine
Houston Hospice
Houston Methodist
Institute for Spirituality and Health
LIfeGift
MD Anderson Cancer Center - World's Largest Cancer Hospital
Memorial Hermann
Menninger Clinic
Michael E. Debakey High School for Health Professions
Michael E. Debakey Veterans Affairs Medical Center
Nora’s Home
Prairie View A&M University
Rice University
Ronald McDonald House Houston
Sabin Vaccine Institute
Shriners Hospital for Children – Galveston
Shriners Hospital for Children – Houston
St. Dominic Village
Texas Children’s Hospital - Largest U.S. Children's Hospital
Texas Heart Institute
Texas Medical Center Hospital Laundry Cooperative Association
Texas Medical Center YMCA
Texas Southern University
Texas Women’s University
The Health Museum: John P. McGovern Museum of Health and Medical Science
The Texas Medical Center Library
Thermal Energy Corporation (TECO)
TIRR Memorial Hermann
University of Houston
University of St. Thomas
UT Health
UTMB Health

MedicalCenterNRG

 

 

TMC is home to the World’s Largest Children’s Hospital, Texas Children’s Hospital & the World’s Largest Cancer Hospital, MD Anderson Cancer Center.

 

Houston Healthcare Industry In The News

HoustonMethodistU.S. News & World Report’s 2017-2018 ranked Houston 
Methodist Hospital in the Texas Medical Center No. 1 Hospital
in Texas.

U.S. News & World Report 

 
                        

Q4 2017 Houston Healthcare Infographic Image