Steve Brown began his career in commercial real estate in 1985, when he began working for boutique real estate company American Commercial Properties. While there, Brown began representing medical practices, a side of his business that continued to grow.
Today, Brown is principal of Bloomington, Minnesota-based Forte Real Estate Partners, and is one of the leaders in the Twin Cities’ healthcare real estate market.
Minnesota Real Estate Journal tapped into this wealth of experience during a recent interview with Brown. This industry veteran shared his thoughts on the state of the healthcare real estate market in the Minneapolis-St. Paul region and the constant changes hitting this sector.
Here is some of what Brown had to say.
How challenging has it been for your medical clients during the past several years?
Steve Brown: They faced supply chain issues that caused construction costs to go up. These supply chain issues also delayed the timeline for completing construction projects. Land costs have risen dramatically. Then throw in the interest rate increases that occurred. That all made the cost of new construction prohibitive for many medical providers. There are plenty of providers who wanted to expand during these last four years but couldn’t afford to do it.
On top of that, I’ve had clients who’ve said that even if they had a facility that they could move into, they didn’t know if they had the right number of professionals to staff it. That’s another layer to the challenges that medical providers are facing today: The burnout of nurses and physicians has led to a lack of staffing.
The staffing issue is a serious one. Go to an urgent care. They’ll tell you that they’re backed up. Go to the emergency room. They’re backed up, too. Where do you go to get care?
Even with these challenges, do you think we’ll see more leasing, development or sales activity in the Twin Cities healthcare real estate market this year?
Brown: I have clients who want to expand. But they must find real estate that they can afford to buy. Real estate becomes a fixed cost. Staffing? They can modify that. If they buy real estate when the price is high, they are stuck with that cost for a long period.
Medical providers dealt with the fast increase of interest rates. That is what put the brakes on the development world. It was a sudden stop: Providers couldn’t afford to build new construction. They couldn’t afford to buy new real estate. Everyone was used to having cheap money and easy access to capital. That has now changed.
The real estate world has to adjust. Is this the new normal? We are not going back to the days of free money. These rates look bad in comparison to what we saw in 2020 and 2021. But historically, they are not bad. One of the things that healthcare providers have to figure out is if this is the new norm. And if it is, how can they conduct business in it?
There is another challenge, too. On Wall Street, healthcare has become its own food group. Wall Street wants a higher rate of return. That has an impact on the rents you need to charge and the profits that you need to make. It’s a bit like a perfect storm.
I think we will see providers get creative, though. They will find creative ways to save money.
What about conversions? Will we see more medical providers moving into and converting office that wasn’t originally built for healthcare use?
Brown: Last year when Minnesota Real Estate Journal had its healthcare summit, we discussed this on a panel. Panelists talked about seven or eight deals in which medical providers moved into general office buildings. Is that a trend? I think it is. There is a shortage of medical office space. That causes users to say that they can build new or try to find an alternative that will meet their fundamental needs and cost less.
It’s not easy to make this work, though. You have to check a certain number of boxes to make sure that the property is a good fit. We’ve had some deals where we have put medical clients into general office buildings. In these cases, the owner was someone who understood healthcare and what was required. The client had to make sure that the buildings had adequate plumbing capacity and HVAC, that they could support the weight of certain medical equipment. It required an investment. But that investment compared to new construction was still more attractive.
Is this a trend? I think the question is more how deep will the trend run? As you watch some of these office assets struggle, you are going to see medical uses moving into them.
Do you expect health systems to continue to focus on ambulatory surgery centers, freestanding clinics and other outpatient facilities?
Brown: There has been a push for more ambulatory care. It’s about getting medical services closer to the patient. Imaging work would always be done at the hospital. Surgery was always done at the hospital. Over time as technology has changed and the reimbursements that medical providers receive have gone down, providers have turned more toward the ambulatory category.
What is the purpose of the hospital then? Providers have redefined those services that are being provided in a hospital setting. Why does a certain type of service have to be provided at the hospital? Can it be provided in an outpatient facility? As much as possible, healthcare systems are trying to push care to the lowest-cost scenario.
Earlier in my career, if you had a hip replacement, you were told that you needed to stay off your hip for six weeks. That was the rule of thumb. Today, you are putting weight on it and walking 45 minutes after surgery. These changes have had significant effects on how fast you get out of the hospital when you actually have a procedure at a central hospital.
It will be interesting going forward. As healthcare has gone more ambulatory, it’s almost taken on a retail type of flair. It’s now about accessibility and signage. Healthcare users want more of the attributes of what makes for a good retail location. Will healthcare providers be more willing to accept a location that doesn’t have the best visibility but comes at a lower cost or will they increasingly say that they need high visibility and an accessible location, even if that costs more? I’d never say that there is a right or wrong answer to that. But there is going to be a dialogue that hasn’t occurred in the past.
What about tenant demand? Are healthcare users actively seeking new space in the Twin Cities market?
Brown: If you are on the private practice side, you either need to grow for scale or you are going to be consumed by a system that wants to grow. Are more systems going to grow and hire new physicians to compete with larger private practices?