The Influence of Healthcare Reform on Commercial Real Estate

Transcription

1 The Ifluece of Healthcare Reform o Commercial Real Estate q First America Fiacial Corporatio ad/or its affiliates. All rights reserved. q NYSE: FAF

2 Research: Our primary data icludes closed trasactios for direct property acquisitios for medical office buildigs. Data reflected through December 9, The iformatio supplied herei has bee supplied by both iteral ad exteral data sources, ad is provided as is. No express or implied represetatio or warraty as to the accuracy or completeess of the iformatio is provided. First America Title Natioal Commercial Services expressly disclaims ay ad all liability that may be based o errors i - or omissios to - this report. This report is for iformatioal purposes oly ad is ot ad may ot be costrued as legal advice. No third party may rely o ay iformatio cotaied herei whe makig legal ad/or other determiatios regardig title practices. Ackowledgmet: We gratefully ackowledge the assistace of Real Capital Aalytics Ic. i collectig ad providig data. Please refer to for more iformatio regardig its methodology ad sources. Although the data is believed to be accurate, its accuracy is ot guarateed ad may be subject to future revisio.

3 The Ifluece of Healthcare Reform o Commercial Real Estate Executive Summary The Patiet Protectio & Affordable Care Act (PPACA), commoly referred to as the Affordable Care Act ad otherwise kow as Obamacare or healthcare reform, was siged ito law by Presidet Barack Obama o March 23, 2010 ad became effective Jauary 1, This legislatio represets the most sigificat overhaul of the U.S. healthcare system sice the passage of Medicare ad Medicaid i PPACA provisios have bee the subject of both cotroversy ad litigatio challegig the act s costitutioality. I due course, the Supreme Court upheld the act i Jue 2012, thereby also makig the tax provisios of the act a reality. 1 Whe the Affordable Care Act takes full effect i 2014, it will prohibit discrimiatio due to preexistig coditios or geder; elimiate a aual limit o isurace coverage; provide coverage for idividuals participatig i cliical trials; provide tax credits for may, icludig small busiesses; establish health isurace exchages, icrease access to Medicaid; ad promote idividual resposibility ad free choice. 2 For real estate ivestors, the big questio is what, if ay, impact this regulatory overhaul of madates, subsidies ad isurace exchages will have o commercial real estate (CRE). Historically, growth i real estate demad has primarily bee drive by populatio desity, wealth accumulatio, price appreciatio, household formatio, employmet growth, ad other ecoomic factors. As a result of healthcare reform, ca we also ow expect to see a accelerated demad for commercial real estate? What wiig strategies are ivestors adoptig i respose to this healthcare reform? The Chagig Ladscape Healthcare is a busiess ad, i the Uited States, it is a multi-trillio dollar ecoomy ($2.5 trillio plus). As a cosequece of the ew healthcare legislatio, it is estimated that a additioal 30 to 32 millio people will receive coverage ad subsidies, which whe usig a idustry multiplier, suggests that there will be a eed for 64 millio additioal square feet of space to accommodate those beig served (1.9 square feet per patiet). 3 It is expected that we will see a icrease i both the demad for healthcare-related space ad services as cosumer prefereces for medical isurace evolve. As the idustry is forced to iovate, growth i employmet of healthcare idustry persoel, from physicia assistats ad techicias to other servicers, is also expected. The eed to accommodate those employees will directly impact healthcare idustry real estate requiremets. Disruptive healthcare megatreds are fuelig the idustry s performace ad drivig its growth. 4 I terms of demographics, the agig populatio meas greater medical eeds ad a icreasig demad for services. The U.S. Cesus Survey predicts there will be 86.7 millio people 65 ad older by 2050, comprisig 21% of the populatio. 5 Added to this are the millios of previously uisured ad those who have aged out of their parets coverage sigig o for coverage uder Obamacare. The followig are amog the other treds we expect to see: The global healthcare market is forecast to reach $3 trillio i Ivestmet i sectors such as health iformatio techologies (HIT), telehealth (virtual healthcare delivery), bio pharmaceuticals ad bioscieces will drive market expasio. The Affordable Care Act will spur growth. Cosumers will cotiue to use icreased purchasig power ad iformatio access to drive healthcare decisios. Chagig models of market access to healthcare will result i a revised delivery system i accordace with a hub ad spokes etwork. 1 Begiig i 2013, taxpayers will start to feel the effect of the Affordable Care Act i the form of two ew taxes: a additioal 0.9% payroll tax assessed o certai taxpayers eared icome, ad a 3.8% surtax o the et ivestmet icome of certai high earers uder Sectio 1411 of the Iteral Reveue Code. 2 Ivestor Survey - Medical Office Buildig (Cushma & Wakefield, Ic. 2013). 3 Sibley Flemig, Health Care Reform: Boo for Commercial Real Estate?, Natioal Real Estate Ivestor, p. 1 (2010) reiolie.com/fiace/ews/health_care_reform_commercial_real_estate_ Buildig Desig ad Costructio Treds for 2014 (ad Beyod), published o Buildig Desig + Costructio, Healthcare Idustry: Market Research Reports, Statistics ad Aalysis, (Dec. 2013).

4 The Ifluece of Healthcare Reform o Commercial Real Estate Healthcare Treds Impact o Commercial Real Estate Patiet-cetered healthcare from doctor-cetered healthcare Poolig of resources of multi-specialty medical suites Cosolidatio of physicia practices Expasio of hospital satellite facilities Opeig of hub ad spoke urget care ad surgical care ceters Physicia / hospital system aligmets ad cosolidatios Coversio ad ehaced utilizatio of existig space Icreasig demad for cliics, MOBs ad replicable care Heighteed regulatory ladscape, hospital cosolidatios Icreasig umbers of electroic medical records (EMR) facilities Coversios of MOBs to iformatio techology ceters Cosolidatio of real estate portfolios Prevetative medical care from reactive medical care Icreasig umbers of telemedicie ceters & prevetative outpatiet care ceters Additioal prospects for welless ceters Escalatig umber of high-visibility walk-i locatios Amog the uiteded cosequeces of healthcare reform ad its associated cost structures may be the geographic footprit of may of the uisured ad the disruptio of the typical operatig models for healthcare delivery. This disruptio may be i the form of the ewly isured seekig prevetative medical care rather tha strictly reactive medical care. Low reimbursemet rates ad a icreased regulatory eviromet are expected to result i may physicias cosolidatig or mergig ito, or aligig their practices with, the hospital system or larger healthcare orgaizatios, while forcig others to operate as physicia cocierge service providers strictly for the affluet. We are already witessig the creatio of syergistic relatioships ad joit vetures i the idustry as a result of healthcarerelated reform. For-profit (FP) ad ot-for-profit (NFP) health systems have begu to form parterships, icludig the Clevelad Cliic (NFP) ad Commuity Health Systems, Ic. (FP); Duke Uiversity (NFP) ad LifePoit Hospitals (FP), as well as Tufts Medical Ceter (NFP) ad Vaguard Health Systems (FP), to ame a few. 7 Real estate ofte costitutes the sigle largest balace sheet asset for healthcare providers, ad this, too, is a area where we aticipate seeig much of the amalgamatio expected to traspire i the idustry. Stark Law ad other reportig obligatios have become a primary focus for health systems as they cosider requiremets to execute real estate trasactios ivolvig physicias ad medical care facilities. Healthcare Trust of America s Director of Acquisitios A Atkiso states, O a atioal level, iformatio is the umber oe capital expediture for most hospitals, followed closely by the acquisitio of physicia practices. Much of these capital requiremets are beig fuded through the moetizatio of the hospitals system s real estate. 8 Healthcare real estate is a iche market, commoly referred to as medical office buildigs, or MOBs. Demad for real estate to support varied healthcare-related busiesses is expected to icrease, ad a accelerated tred for ivestmet i medical office buildigs may be a sigificat byproduct. MOB ivestmet cotiues to outperform other sectors i the commercial real estate market. CAP rates for class A ad class B MOBs have cotiued to decrease over the prior 12 moths as a result of icreasig property values, validatig these asset classes as favored by may ivestors. 7 Ivestor Survey Medical Office Buildig: A Cushma & Wakefield Advisory & Evaluatio Publicatio, Rodric J. Bradford ad Tim J. Radall, MOB s Big Hurdle: The Affordable Care Act & Its Effects o Healthcare Real Estate, Commercial Executive Magazie, Arizoa Real Estate News, Page 2

5 The Ifluece of HealthCare Reform o Commercial Real Estate This chart was icluded ad aalyzed i Buildig Desig ad Costructio Treds for 2014 (ad Beyod), published o Buildig Desig + Costructio, The Ivestors Healthcare REITs have gaied value i the real estate sector. 9 This is due primarily to their portfolio diversificatio, strog teats ad varied icome sources such as isurace compaies, assisted-livig facilities, pharmaceutical compaies ad biotechology compaies. Ivestmet maagers are also lookig at medical office space as a growth sector. I light of the ew law, some ivestors are also begiig to dispose of assets i the medical office sector. For example, i November 2013, Seavest Healthcare Properties, LLC, a real estate ivestmet firm specializig i this sector, sold 13 properties to Duke Realty for $342 millio. The exit strategy for real estate assets by may smaller ad idepedet physicia groups may also be a likely cosequece of the chagig regulatory eviromet ad cost structures of the Affordable Care Act. Owers of MOBs may well aticipate a icrease i value of their real estate assets over the ext three to five years, ad dispositio as well as acquisitio strategies will come ito play. Lucrative ivestmet opportuities may exist i healthcare real estate with a heighteed demad for efficiet, outpatiet facilities, may from groud-up developmet projects. Oe such developmet site is the March LifeCare Campus i Riverside, Calif., which is expected to be 3.5 millio square feet. March Healthcare Developmet, LLC is developig this 236-acre health ad welless city o surplus lad of the former March Air Reserve Base, with a estimated cost of more tha $3 billio. This model will provide a cotiuum of care i oe locatio ad will iclude a leadig-edge medical research facility; a hospital; medical office space; retail space; restaurats; seior care, skilled ursig, short- ad log-term acute care ad hospice facilities; outpatiet ad ambulatory surgery ceters; ad a hotel i a sigle masterplaed commuity. Essetially, it will be a health-care city withi a city. Doctors, pharmacists ad practitioers all provide medical care from some type of medical office buildig, ad this is the primary sub-sector i the real estate sector that we track (i additio to seior housig). Oe of the primary drivers of the ew reform may likely be the shift of healthcare delivery from hospitals to medical office buildigs. The result will be a evolutio i patiet-cetered healthcare from doctor-cetered healthcare as a model for delivery. The demad for primary ad urget healthcare facilities is already strog, ad we are also seeig expaded roles for pharmacists ad urses with ehaced credetials, resultig i a ew model for the medical office buildig. 9 I REITs accouted for $2 billio of the medical office market i 2012 as compared with $572.4 millio for equity real estate maagers. Arlee Jacobius, Health-care act could be good Rx for commercial real estate Affordable Care Act creatig ivestmet opportuities i medical facilities, (Sept. 2, 2013). Page 3

6 The Ifluece of Healthcare Reform o Commercial Real Estate As a result of may of the chages outlied above, the MOB model will be forced to chage. Some ways i which these chages will occur is through the shiftig of these buildigs to more digitally, aesthetic appealig ad greeer developmets. 10 There will be sigificat opportuities for ehaced utilizatio of MOB space. We aticipate seeig a growth i isurace claims processig ceters, expasio of hospital satellite facilities, electroic medical records ad high-tech iformatio data facilities, as well telemedicie ceters with videocoferecig ad high-techology imagig. I additio, we expect to see ambulatory care ad surgical care ceters poolig their resources uder aliged umbrella orgaizatios as a sigle provider, a result of the Affordable Care Act s ew reimbursemet model of Medicare Accoutable Orgaizatios. Multi-specialty suites, where specialists ca share resources ad costs, frachised etities ad joit vetures will all play a part i the ew MOB eviromet. The Medical Retail Model Medical retail space will be a relatively ewer ad faster growig sub-sector i the retail asset class. The Natioal Ceter for Policy Aalysis (NCPA) estimates that there will be more tha 3,200 such cliics i 2014, ad that they will operate as high-visibility retail walk-i locatios for medical care. We expect to see the rapid expasio of hospitalcoected cliics, which typically operate at lower costs tha primary-care doctors offices or emergecy rooms. These types of facilities will iclude welless ceters, urget care ceters, prevetative care ceters, outpatiet care ceters, hospital retail cliics, ad medical istitutio educatio facilities. Mayo Cliic aouced i Jauary 2013 that it expects to sped $3 billio to expad its facilities, icludig retail ceters. Kaiser Pemaete is opeig a 32,000-square-foot medical facility i Portlad, Ore., i the ow-defuct store site of Circuit City. This site, kow as Gateway Medical Office, will provide medical imagig, pharmacy ad laboratory services, all i oe locatio. Walgree s, CVS ad Rite-Aid have all implemeted routie exams ad aual checkups through these retail models, allowig their facilities to ultimately compete with hospitals as eighborhood outpatiet ceters. Top Buyers & Sellers (prior 24 moths) by Volume Buyers Sellers Vetas, Ic. Griffi-America Healthcare REIT II America Realty Capital Harriso Street Real Estate Capital LLC Duke Realty Corp. Realty Icome Corp. Healthcare Trust of America HCP, Ic. CNL Fiacial Group Health Care REIT Healthcare Realty Trust Cogdell Specer Ic. Washigto Real Ivestmet Trust America Realty Capital Trust Seavest, Ic. LaSalle Ivestmet Maagemet The Boyer Compay Harriso Street Real Estate Capital LLC Motecito Medical Kilroy Realty Corporatio Duke Realty Corporatio Columbia Developmet Compaies Page 4 Usig Real Capital Aalytics data, we estimate that the majority of pricipals egaged i MOB trasactios are private etities. For the years 2010 through 2013, early 50% of deals were doe by private players (49.32%), followed by public players (29.37%), istitutioal players (10.09%) ad equity fuds (6.49%). CMBS represeted less tha.60%. of this volume durig this timeframe; however, that volume is expected to icrease. While trasactioal volume for medical office buildigs appeared to be rather substatial i 2012, estimated at more tha $6.7 billio ad the largest year o record sice 2001, early December 2013 figures idicate that we may approach this volume, but likely will ot surpass it. Closed MOB deals for 2013 are estimated at $6.7 billio, with approximately $290 millio additioal i the pipelie. The majority of MOB properties are i the wester part of the Uited States, with Los Ageles beig the largest metro with MOB properties. 10 Buildig Desig ad Costructio Treds for 2014 (ad Beyod), published o Buildig Desig + Costructio,

7 The Ifluece of HealthCare Reform o Commercial Real Estate Notable Deals Pedig (as of December 2013): Washigto Real Estate Ivestmet Trust (WRIT), a public REIT, is sellig a three-property portfolio to Harriso Street Real Estate Capital, a real estate private equity firm. The total sale is rumored to be aroud $193.6 millio. November 2013: Seavest, LLC (SHP) a leadig ivestor i the MOB sector sold 13 properties to Duke Realty for $342 millio. September 2013: Seavest, LLC (SHP), i partership with Cimielli Real Estate Corp., broke groud o a $300 millio, 300,000-square-foot (plus) Covetus medical office buildig o the Buffalo Niagara Medical Campus. July 2013: Vetas, Ic., a publicly traded REIT, acquired from LaSalle Ivestmet Maagemet a seveproperty MOB portfolio i Illiois for approximately $81.7 millio. April 2012: Vetas, Ic. a publicly traded REIT, acquired from Codgell Specer Ic. (NYSE: CSA), its 68- MOB portfolio of high-quality medical office buildigs (92% occupied), icludig two lease-ups ad two developmets, ad was made part of the Lillbridge Healthcare Services, Ic. subsidiary platform. This trasactio closed for $760 millio. CMBS Medical Office Maturity Coclusio Source: Trepp, LLC. The velocity at which the healthcare idustry is chagig caot be overestimated. While we are already experiecig disruptio ad chage resultig from healthcare reform, techology, big data, regulatory ad other impactful forces i the healthcare idustry, it is simply too soo to accurately predict the full impact these chages will have o the commercial real estate idustry. Despite the ucertaity, we are seeig a umber of treds such as a icreasig demad for MOBs ad heighteed activity i this asset class, both of which reflect the healthcare idustry s chagig real estate eeds. The demad for primary ad urget care facilities is already strog, with so may chages uderway ad record-breakig medical practice cosolidatios ad mergers, as well as acquisitios of medical practices by large facilities also takig place. While may chages may reflect the cyclical ature of real estate, the questios remai to what extet the cycle will be guided by outside forces ad how ivestors will respod. Page 5

8 Lida J. Isaacso Seior Vice Presidet, Director of Busiess Itelligece First America Title Isurace Compay Natioal Commercial Services First America Title Isurace Compay, ad the operatig divisios thereof, make o express or implied warraty respectig the iformatio preseted ad assume o resposibility for errors or omissios. First America, the eagle logo, First America Title, ad firstam.com are registered trademarks or trademarks of First America Fiacial Corporatio ad/or its affiliates q First America Fiacial Corporatio ad/or its affiliates. All rights reserved. q NYSE: FAF NCS-4/2014