Can Healthcare Rescue Real Estate?
Assessing the Potential Impact of Healthcare Reform on Commercial Real Estate
by Robert O'Brien, Deloitte & Touch, LLC, Chicago
The effect of the Patient Protection and Affordable Care Act of 2010 on the real estate industry might not be obvious. However, the reform may present a unique opportunity for growth and innovation for distressed retail and office assets. It has been well established that the recession has battered real estate; occupancy levels across all asset types have suffered dramatically. While healthcare reform alone cannot be expected to unilaterally revive the real estate industry, it does present a welcome opportunity in the form of accelerated demand-driven absorption for certain segments. The savvy real estate investor could convert on this new demand for an alternative medical service model and a significantly enlarged population of insured individuals by utilizing retail and office vacancies to house retail and walk-in healthcare clinics.
Historically, real estate growth has been driven by macro factors like increased gross national product, population density, increases in wealth, and consumer spending. But this legislation is of the size and importance that from a macro standpoint it could have a significant impact. It could change certain real estate demand drivers and generate alternative models for the delivery of healthcare. There are likely to be more ambulatory care centers and other more convenient ways of delivering medical and healthcare services.
Today, approximately 46 million Americans are uninsured. Early estimates suggest 32 million Americans may have insurance coverage by 2016. Using a current industry multiplier of 1.9 sq. ft. per patient to estimate the effect of this patient influx, up to 64 million additional square feet may be required. Many of the existing and newly insured seeking preventive and ambulatory healthcare services will value convenience and accessibility. High retail and office vacancies present a possible solution to this dilemma, along with a welcome opportunity for two of the most severely battered segments of the real estate industry.
While office space has historically held a small portion of medical offices, using retail space for this use is a newer concept. A 2006 study of medical service preferences revealed that consumers are more likely to visit retail locations for certain services:
- Wellness Programs (e.g., weight loss, smoking cessation)
- Preventive Care (e.g., flu shots, cholesterol tests)
- Urgent/Unplanned Care that requires a prescription
A 2008 Deloitte report titled Retail Clinics: Facts, Trends, and Implications stated that retail clinics, which can be found in pharmacies, grocery stores, and big-box retailers “... are not a fad—they are a disruptive innovation with a sustainable value proposition (price, quality, service) that is welcomed by consumers.” As a cheaper alternative to doctors’ offices and hospitals, these walk-in clinics may become even more popular as a result of the legislation. The lower costs associated with these options may be attractive to newly insured patients who could face difficulty finding a primary care physician willing to accept their form of insurance; the added convenience of walk-in appointments at big-box clinics is another plus.
There is a second component to the retail strategy that not only leverages the space available in retail outlets, but also benefits from the increased visibility and the established audience that can be found in malls and shopping centers. Medical institutions have begun to explore the benefits of high-visibility retail locations for health education/ outreach storefronts. These storefronts are appearing in malls alongside clothing retailers and food outlets, with the intent to “piggyback” off of the built-in audience available in day-to-day shoppers. In Bloomington, Minnesota, the Mayo Clinic has committed to occupying space in the expansion of the Mall of America. In Baltimore, Maryland, the University of Maryland Medical System has operated an educational storefront in Arundel Mills for the past four years. Preventive care and health education will become more prominent as a part of the new healthcare legislation, and retail space dedicated to health education could see a boost in the near future.
We expect that demand for medical services will increase, consumer preferences will change, and the healthcare industry will innovate. The extent to which these changes will affect the real estate industry will vary based on several external factors such as availability of medical services and the consumer dollars spent on healthcare. Real estate owners and operators have an opportunity to assess their current real estate portfolios and determine how they can most effectively leverage the growth of the healthcare industry. A winning strategy will require both deep knowledge and perspective of the healthcare industry, and an understanding of the trends, challenges, and benefits for the real estate industry.
About the Author
Deloitte & Touche LLC, Chicago