Health systems eye real estate moves in post-pandemic world

Health systems facing economic headwinds and the aftereffects of the pandemic are taking a closer look at divesting or squeezing more value out of their real estate holdings.

Why it matters: Real estate can account for up to 40% of a health system’s balance sheet and also represent a major chunk of some communities’ commercial real estate inventory.

The big picture: Inflation is still driving up the costs of just about everything. With the threat of a recession, the bond markets are drying up and cash is tight.

• “Health care organizations are absolutely right now really pulling back on capital and being very, very careful,” Kaufman Hall managing director Eric Jordahl told Axios.
• “The access to capital for most organizations has become constrained. So a lot of them are either pulling back, deferring, pushing things down the road trying to manage though with a tighter capital budget,” Jordahl said.

State of play: Work-from-home policies and the continued use of virtual care are forcing a reckoning.

• “It’s very common for health systems to say they have a 50% expected reduction in their administration space needs. That’s a huge reduction,” said Jay Johnson, a managing director at JLL, a commercial real estate firm which authored a recent report on health care real estate trends.
• They are looking to get creative, such as renegotiating deals with landlords for less square footage over a longer lease period or identifying underused clinical space and either mothballing it or repurposing it for more productive uses, Johnson said.
• Penn Medicine recently determined only 10% of its 600,000 square feet of administrative space is being used, the health system’s real estate expert Allison Wilson-Maher said during a recent event hosted by Bisnow.
• “That’s a lot of space not to be used. So we’re recycling 300,000 square feet for a different use because we own it. And the other 300,000 square feet, we are likely going to be giving up and going somewhere to consolidate to a much smaller footprint,” Wilson-Maher said, per Bisnow.

Yes, but: On the clinical side, there’s closer to a 15% to 20% reduction in space for many health systems, Johnson said.

• The surge in telehealth also is softening demand for medical office space, especially lower-acuity settings like emergency care centers, experts say.
• But it’s still unclear what long-term impact telehealth will have on in-person volumes. The growing aging population may offset some of the reduction in clinical space needs, Johnson said.

The intrigue: In my years of reporting on hospitals, nothing can get people more riled up than talking about parking. But the demand is actually still far below what it was pre-pandemic, Johnson said.

• “It’s still an issue, but who parks, right? It’s the patients and the staff. And a lot of the hospitals have greatly reduced their administrative staff [working] at their hospitals and that has freed up spaces,” Johnson said.

Be smart: It’s clear the pandemic changed how a lot of health systems thought about how they wanted to use their space, said Lisa Goldstein, senior vice president at Kaufman Hall.

• “We saw a lot of organizations put a pause on a strategic capital and go back to the drawing board and reevaluate,” Goldstein said. “Construction costs are rising. How many beds do we really need? Do we need more or less based on what we’ve learned?”
• For example, South Dakota-based Sanford Health announced in August it put a Minnesota hospital project on hold, citing uncertain times.
• Carilion Health also postponed the construction of a major new mental health care facility in Roanoke, Va., citing negative financial impacts from the pandemic, the Roanoke Times reported.
• In July, Provident Health paused an eight-story building project in Cook County, Ill., due to ballooning costs, with officials saying they’d reassess the plans.

The bottom line: We often think of health systems as major employers in a community, or as providers of essential services.

• But the pandemic and the economy are surfacing how much they can potentially swing real estate prices or rein in commercial development.