A revenue dip of up to 60 percent. That’s the bottom line number cited by one CRE pro when talking about the negative impact that the COVID-19 pandemic and the resulting shutdown orders have had on the healthcare real estate market.
That number was cited during a recent webinar held by REjournals and Minnesota Real Estate Journal, COVID-19 and the Effect on Healthcare and Medical Properties. The webinar was part of REjournals’ Breaking Through the Disruption series.
The webinar included insights from healthcare real estate experts Mark Davis, principal with Minneapolis-based Davis; Chantily Malibago, director for real estate development and healthcare with Minneapolis’ Mortenson; Brian Bruggeman, vice president of healthcare services with the Minneapolis office of Colliers International; and Erwin Effler III, vice president of real estate development and healthcare with Minneapolis’ Ryan Companies US. Chris Jacobson, vice president of Lee & Associates, served as moderator for the panel.
These healthcare experts agreed that while the pandemic and its aftermath have strained the finances of hospitals and medical providers across the country, the healthcare industry is well-poised to recover. Why? People will still need to see doctors, even if they’re worried about COVID-19. They’ll still need to visit hospitals. And they’ll still need to schedule surgeries and other procedures at freestanding medical clinics and ambulatory care centers.
The U.S. population continues to get older, too. This will only lead to a greater demand for medical services, something the healthcare industry was seeing before the pandemic put a hold on elective surgeries and routine medical visits.
“Healthcare has been hit hard,” Effler said. “But we think healthcare will see one of the strongest comebacks, too. There had been an insatiable amount of demand for healthcare investment during the last five to 10-plus years. It has been a needs-based demand. Everyone needs healthcare. It is very understandable why healthcare has been hit so hard during this pandemic. But there is no doubt in anyone’s mind that it will come back fast, too.”
Malibago said that COVID-19 has had a significant impact on healthcare real estate. The big challenge during the earliest days of the pandemic? Healthcare providers canceled elective surgeries and procedures to make room for COVID patients.
This, of course, had a profound negative impact on the revenues of healthcare providers, Malibago said.
“The financial pressures on healthcare providers are tremendous,” she said.
At the same time, the economic slowdown that followed state shutdowns has also hurt the bottom lines of medical providers. Malibago said that as people lose their jobs – and possibly their health insurance coverage — they’ll still avoid non-emergency medical care.
This means that many people won’t return immediately to their doctors or medical providers even as states reopen their economies, at least not until they find new work and boost their incomes.
And what will the near future of healthcare real estate look like as the country reopens? Malibago said that while critical care will still take place on larger hospital campuses, even more medical services will be driven off these sprawling facilities and into smaller, ambulatory care centers.
This was already a trend before COVID-19. But as patients seek to avoid large crowds of people, it makes sense that medical providers will shift even more of their procedures and care to smaller, less-crowded facilities.
Malibago also said that medical providers will continue to boost their telemedicine services. Not all patients are comfortable visiting their physicians and other care providers through online chats or remote services, but enough are that medical providers will continue to invest in remote care, Malibago said.
“We say that telemedicine is here to stay,” she said.
This could all mean big changes in the way healthcare providers make real estate decisions. Some providers might need less space as they invest more in remote care. Others might seek more space for smaller satellite offices. And other medical systems might seek out merger and acquisition opportunities.
“I think we’ll see an acceleration in changes in how providers deliver care,” Malibago said. “A provider’s asset mix is always an output of a healthcare organization’s mission objective. Some might want to provide more redundancy. Other systems will focus on recapturing the revenue they lost during the pandemic. Some might want to double down on other service lines. Flexibility will be important when providers determine what their real estate strategy will look like. Providers’ healthcare portfolios will be optimized, flexible and strategically positioned to address community health needs and priorities.”
Effler said that the pandemic has hit some medical providers harder than others. He said that a third of providers are still struggling with the financial hits they’ve taken, while a third are putting any real estate and expansion plans on hold while they wait to see how the pandemic plays out as states reopen their economies.
The final third? These providers are moving forward with their real estate plans, Effler said.
“They still have cash. They know what they want to accomplish. They are moving forward,” Effler said. “Hopefully, that middle third will start joining that group and start moving forward, too.”
Moderator Jacobson asked webinar participants if real estate deals are still getting done during the pandemic.
Davis said that this depends on the deal. Providers that had deals in process before the shutdowns hit mostly completed those transactions, Davis said. Today, most of the mid- to high-credit medical systems are moving forward with their development projects, he said.
Healthcare providers today have had a better chance to analyze the market and the pandemic’s effect, Davis said. A growing number of them are now ready to continue with whatever real estate moves they were planning before COVID-19 hit, he said.
“It has gone from tenants and clients being in a panic to them now having more time to focus on potential strategic issues,” Davis said.
There has been a fairly dramatic slowdown on the acquisition side, though, Davis said.
“Most of the large healthcare REITs have been sitting on the shelf for the last 60 to 75 days,” he said. “They haven’t been in the acquisition market.”
This, though, has provided opportunities for others, Davis said. He said that his company is in the process of buying three medical properties in Tennessee. The price on these properties had fallen, making them a strong acquisition candidate, Davis said.
Davis said that leasing activity has slowed, too. He said that lease renewals are getting done, but many health systems have put new leasing activity on hold.
This is starting to change, though, Davis said.
“We are seeing more positivity in the market today,” he said. “We are seeing more activity starting to develop.”
Bruggeman with Colliers agreed that the leasing end of the healthcare real estate market has come to a near standstill. Healthcare providers are simply struggling too much with a reduction in revenue to consider spending more money on new medical space, he said.
“Groups are trying to figure out what kind of capital they still have in place,” Bruggeman said. “There has been a dramatic impact on cash flow because of COVID-19. Their billables have stopped coming in because of the work that wasn’t completed in the last three months. They are still assessing where they are at.”
Some providers have put deals on hold as they evaluate how they might change the way they deliver medical care, Bruggeman said.
“Will telemedicine be a cheaper model for them?” Bruggeman asked. “This pandemic has forced providers to rip off the band-aid and more fully embrace the telehealth model.”
Effler, while agreeing that the healthcare industry has been hit hard so far by the pandemic, said that this sector’s future remains bright. He said that the best core real estate assets in this sector are still seeing strong pricing. He said that investor demand is still strong for healthcare real estate.
“Yes, financials have been hit hard. Credit ratings might be taking a hit. But investors are still looking at this as a resilient and strong sector,” Effler said.
The industry will change, though, Effler said. He said that providers are focusing more on expanding their telehealth offerings and potentially reducing their real estate footprints. That will have an impact on healthcare real estate developers in the future.
“But the need for physical space, for bricks and mortar, will always be there,” Effler said. “Not everyone is comfortable with telehealth.”
Malibago said that it is the patients themselves who will determine much of the immediate future of the healthcare industry.
No one knows yet when consumers will feel comfortable returning to hospitals and medical offices in bigger numbers, Malibago said. No one knows when they will be comfortable with scheduling in non-emergency medical treatments.
And until patients feel safe, the healthcare industry will continue to struggle with lower revenues, Malibago said.
“This all centers around consumer behavior,” Malibago said. “How are healthcare organizations marketing to consumers, letting them know that it is OK to come back?”
Bruggeman said that the healthcare industry, like most industries today, faces plenty of unknowns. In the middle of this uncertainty, providers are trying to determine how they can get their cash flows back in order and their balance sheets corrected, Bruggeman said.
One of the biggest questions providers face is when, or if, patients will begin rescheduling those elective procedures that are such big moneymakers in the healthcare system.
“Surgery groups that weren’t allowed to perform elective procedures now are trying to figure out if patients are going to come back,” Bruggeman said. “Is there deferred demand for elective care or are patients still not interested in coming in for these procedures yet? Revenues will not come back all at once. There are still a lot of questions that providers need to address.”
Jacobson also asked panelists if they expected to see more mergers and acquisitions as the economy reopens.
Bruggeman said that operating an independent medical practice had been a tough business before the pandemic hit. Today, it might be an even more challenging one.
“This might make independent providers reconsider aligning with a major group,” Bruggeman said. “A lot of providers’ strategic real estate plans might be on hold as they evaluate whether they should align with a system or remain independent.”
Davis said that before the pandemic there was a wave of private equity groups acquiring medical systems. He said that this trend won’t slow.
“We have seen no slowdown in the number of groups looking to combine with others or sell out,” Davis said.
Malibago said that she expects to see continued merger and acquisition activity in this sector. Healthcare providers that are facing financial struggles will be especially interested in mergers, she said.
“Organizations that were already strained financially before COVID will become the target of larger healthcare organizations,” Malibago said. “They will turn to some of these larger organizations for assistance.”