Will Healthcare Be Commercial Real Estate’s Savior?

With the Patient Protection and Affordable Care Act now the law of the land, commercial real estate executives are waiting to see what impact the legislation will have on their business.   Consensus is that the new healthcare law changes crucial demand drivers for real estate by introducing alternative models to deliver medical services.  The potential to impact commercial real estate lies in the fact that as many as 32 million additional Americans will receive coverage when the law becomes fully implemented in 2014.  They will need a place to receive healthcare.

In a white paper written by Kenneth Meyer and Rob Grossman, Principals with Deloitte Consulting LLP, the authors note that “Using an industry multiplier of 1.9 SF required per patient to estimate the net effect of additional patients on space utilization, it can be estimated that 64 million SF will be required to meet the increased demand.  Since the demand for additional medical space will begin almost immediately, the industry cannot afford a long wait due to development of new medical office buildings, nor can the industry continue to thrive by building more square footage without addressing current square foot absorption.”

To fill growing demand, retail locations are becoming increasingly important to healthcare, especially wellness centers, preventive care clinics and urgent care clinics -a new and emerging trend.  As of February of 2010, there are approximately 1,200 retail clinics in the United States.  “CVS leads the market with 569 retail clinics in 25 states and the District of Columbia,” according to the authors.  “Recent changes in healthcare legislation should help to drive demand and support profitability.  Retail space dedicated to health education could see a boost in the near future.”

Healthcare providers present diversity in a tenant mix and can protect the owner against shifting market conditions.  “A recent study of Fitch-rated Real Estate Investment Trusts (REITs) in the U.S. further illustrated the strength of the healthcare real estate sector,” according to Meyer and Grossman.  “In 2009, Healthcare REITs were the only property type that did not receive a downgrade by Fitch.  In fact, during that same time period two Healthcare REITs actually received ratings upgrades.”