Healthcare Industry Remains One of the Most Resilient Commercial Real Estate Sectors

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Healthcare Industry Remains One of the Most Resilient Commercial Real Estate Sectors

Alison Flynn Gaffney

CHICAGO – The healthcare industry remains one of the most resilient commercial real estate sectors, according to a recent report from JLL.

The industry has overcome the pandemic and is looking towards an innovative future, which has proven itself time and again over the last five years. According to JLL’s new Healthcare Real Estate Outlook, five trends will dominate healthcare in 2024: a focus on organizational fitness; rising costs with a tight talent pool; consolidation disruptions and vertical integration; disruptors accelerating consumer-centric care; and artificial intelligence (AI) on the way from theory to practice.

“We expect rising costs and declining margins to continue to put pressure on health systems and other providers this year,” said Jay Johnson, US Practice Leader, Healthcare Markets, JLL. “Economic conditions will hopefully improve, but capital, labor and other costs remain a challenge. High costs and the broader question of the long-term sustainability of the healthcare system will continue to drive innovation and disruption from new entrants and technologies. As health systems grapple with today’s challenges, competitive pressures mean they must also imagine what health care will look like after 2024 and not allow the current landscape to completely monopolize planning and investment.”

According to Kaufman Hall, average hospital margins were negative for over a year between January 2022 and February 2023, and half of hospitals and health systems are still operating at a loss despite slowing wage growth and inflation. Fortunately, macroeconomic forecasts predict inflation will continue to slow over the course of the year, but prices and interest rates are likely to remain high for now. For health systems, this means margins are likely to improve, prompting them to focus on other areas, including real estate, to combat rising costs.

Focus on organizational fitness

According to a July 2023 survey, JLL healthcare and life sciences clients ranked reducing operational costs as their top priority, resulting in healthcare systems and care providers leveraging their real estate to reduce costs and increase revenue. Increasingly, in addition to the more traditional emphasis on the operating costs of owned and rented properties, this also includes assessing their internal real estate function and organization.

“This is a year of reevaluating, adapting and developing new strategies,” said Alison Flynn Gaffney, FACHE, president of JLL’s Healthcare Division. “Real estate costs represent a significant portion of a health system’s budget, so adjusting real estate portfolios and optimizing real estate and facility management can free up capital that can be used for patient care and related mission priorities.” Health systems, providers and Investors who thoroughly vet their real estate team and focus on cost optimization and revenue generation will gain a competitive advantage in this dynamically evolving industry. While it may not be able to solve every healthcare challenge, real estate can be part of the solution.”

Additionally, by leveraging technology and leveraging the expertise and capabilities of third-party service partners, healthcare organizations can realize the full value of both the real estate and facilities division and the operational performance of the sites they are responsible for procuring and maintaining. In this way, the organization can approach its properties more strategically and make changes that both improve operations and enable the organization’s mission and business goals in the face of difficult economic conditions.

Rising wages + tight talent pool

Wages for healthcare jobs have risen dramatically in recent years, outpacing inflation. As wage pressure eases from record high rates, the structural healthcare workforce shortage will continue to pose challenges for operators in 2024. Beginning in 2021, the healthcare and social assistance sectors saw a dramatic increase in layoffs and job postings as the pandemic exacerbated an already challenging profession.

While the number of job openings has begun to decline, the quit rate has remained stable: about 2.5% of healthcare workers leave their jobs each month. According to the advisory board, total healthcare volume is expected to grow by 9.9% from 2022 to 2027, and Oxford Economics predicts that employment in healthcare and social assistance will only grow by 7.8% over the same period.

“Healthcare is fundamentally about people taking care of people, so hospital systems and providers must adapt in other areas of their business to accommodate continued higher wage growth,” Gaffney said. “Unless significant changes are made, staffing and labor challenges will only worsen, which could lead to delays in patient care, continued burnout among workers, and a slowdown in the timeline for providing additional services and opening new healthcare facilities.”

Consolidation and vertical integration

There were 18 hospital and health system transactions announced in 2023, more than the previous two years combined. Health systems are experiencing disruption as independent hospitals, smaller systems and physician practices increasingly consolidate under the umbrella of larger health systems, and other payers and pharmacies are following suit through vertical integration.

“Although M&A is held back by uncertain capital market conditions, they will see renewed interest in 2024 as interest rates stabilize,” said Kari Beets, Sr. Manager, Healthcare Research, JLL. “Mergers will focus on adding components to their business, such as expanding a hospital system to include freestanding imaging or retail locations.”

Nonprofits with better access to credit will come out on top, particularly academic or specialty hospitals that offer a high-quality, differentiated type of care. According to Kauffman Hall, academic and specialty hospitals outperform general acute care hospitals with inpatient occupancy rates of 70% and 53%, respectively. Systems or providers that have a liquidity reserve now are better positioned for the future.

Additionally, systems, payers and pharmacies are vertically integrating through mergers to better control costs and capture revenue from the same patients across the spectrum of care. Hospital systems acquire outpatient operators or primary care practices and can thus benefit from the shift from inpatient to outpatient care.

Disruptions accelerate consumer-focused care

The shift from inpatient to outpatient care will continue for a decade and new entrants will accelerate the disruption. Technology companies, retailers, private equity firms and for-profit operators will lead the shift toward a more holistic view of patients. Health systems will follow this trend by expanding their care offerings as part of a consumer-focused location strategy.

Following the consumer-centric model, health systems and providers will advance the “retailization” of health care by positioning facilities close to the consumer, offering multiple services in one location, and incorporating other health-focused amenities.

“The healthcare landscape is changing,” Johnson said. “Companies outside of traditional healthcare systems will continue to invest and revolutionize care models in 2024, and as innovations such as digital health and analytics, as well as new classes of medicines and gene therapies, enable better overall health, healthcare systems and providers with this focus are on the verge of benefit .”

Bringing AI from theory into practice

AI is a partner that empowers physicians and administrators to focus on the parts of their work that only humans can do. In 2023, healthcare recognized the potential of AI to impact network planning, operations, cost management and patient care.

In 2024, healthcare systems, providers, and adjacent healthcare services will increasingly use AI to help with decision-making and improve the efficiency and quality of healthcare. AI can also help optimize facilities to improve patient care, and health systems can use AI to understand how and where a provider’s time is spent and interpret that to better plan facility utilization.

“Given the various security and regulatory requirements and concerns, adoption of AI in healthcare will be cautious and slower than other sectors,” said Andrew Quirk, Institutional Industries Lead, Project and Development Services, JLL. “Involving physicians and facility staff in the development and implementation of AI will enable the greatest possible acceptance and use.

JLL Healthcare offers a comprehensive range of real estate and facilities solutions for hospitals, physicians and other care providers, as well as real estate investors who own and operate medical and senior living properties. The company helps its healthcare clients plan, source, finance, purchase, lease, sell, construct, optimize, manage and maintain the most advantageous facilities across the United States for all property types along the care continuum and serves over 550 million square feet of healthcare real estate per year. Its professionals have extensive technical and market knowledge and are equipped with the most innovative, data-driven analytics and business intelligence in the industry. Visit us.jll.com/healthcare to learn more.

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