The effect of mergers on healthcare real estate
Healthcare in America is changing and bringing real estate with it. Healthcare networks are growing their market shares, and healthcare mergers and acquisitions have been on the rise in the first half of 2014, according to an August report by Berkery Noyes. Deal volume increased during that time by 18 percent, to the tune of $5.45B, according to the report. This is something Arizona has a front row seat to. In July 2013, Tenant Healthcare bought Vanguard Health Systems, which operates Abrazo Health Care, the second largest health care delivery system in Arizona. Last October, Scottsdale Healthcare and John C. Lincoln Health Network finalized its system-wide affiliation. In August, Banner Health announced it acquisition of University of Arizona’s medical facilities and programs. Scottsdale-based Healthcare Trust of America, Inc. (HTA) acquired six medical office buildings (MOBs), outside of Arizona, from ProMed Properties for $200M, the largest MOB acquisition of the first half of 2014.
“Most medical real estate in the Valley has been built around a hospital trying to draw patients into their beds,” says Ensemble Real Estate CEO Randy McGrane. “They’ve invested capital into them, and that’s how they get a return.” However, that idea, catalyzed by the Affordable Care Act, technological advances and general market conditions, is becoming outdated, says McGrane. It’s more profitable for networks to have out-patient care spread within communities, away from the hospital and closer to patients. This is evidenced by the dozens of ambulatory care facilities Banner Health has constructed throughout regions.
“Health systems and physician groups have been forced to compete for market share in the pursuit of volume and reduced overhead expenses,” says HTA’s Executive Vice President, CFO, Treasurer and Secretary Robert Milligan. “From a medical office perspective, this has resulted in tenants that are better credits, looking for larger blocks of space and focused on key locations that will help their practices generate volume. Locations that can offer these features have and will continue to benefit from this consolidation trend.”
As a result, there are more off-campus development happening. The one exception, McGrane notes, may be one at Banner Estrella, for which the medical network recently placed and RFP. Existing on-campus buildings, therefore, are suffering vacancies higher than 25 percent in some cases. Highest and best use for these buildings over time, McGrane says, includes facilities that support a hospital’s known specialties or encourage post-acute care and rehabs, which are more cost-effective to invest in, given the reimbursement systems established by the ACA.
“It’s a painful change,” McGrane says. “Ultimately, it will end up being a better system…We have so much clinical advancement, but we haven’t developed the underlying system to go with it.”
“The great thing about these larger tenants is that they are focused primarily on driving volume into their practices,” Milligan says. “This means that they are focused on office space that allows the physician to utilize the infrastructure of a hospital or surgery center and also provides for an efficient patient experience. Cost, while important, is becoming a secondary factor. We are actively investing in our buildings to attract these larger tenants who will be the long term providers of healthcare in this country.”