The healthcare real estate market is in the midst of a shift. In 2019, four key trends will affect the HRE market. These trends represent new and ongoing shifts in the healthcare industry that will be of immediate importance to providers, developers, and investors in the coming years.
Technological Growth in Healthcare Delivery
The mixing of technology and healthcare is not set to make immediate waves in the industry, but slow and steady changes in the way healthcare is served to consumers. During 2019, mergers and acquisitions between tech companies and healthcare providers will continue to create disruption in the industry. The introduction of more tech-centered personalization in healthcare delivery will likely cause increased consolidation and a rise in medical office buildings.
According to a report by IMEG and Transwestern, big data will play a key role in the changing healthcare environment. As pressure to reduce costs grows stronger, healthcare providers are looking toward data analytics to create solutions that reduce the direct involvement of medical professionals while increasing the quality of care given. This value-based strategy is an evolution of a previously volume-based system that sought to increase the volume of patients being treated at existing facilities.
The Future of Healthcare Providers, Investors, and Developers
Healthcare real estate will be more focused on creating facilities that operate on a value-based system rather than a volume-based system. As investment funds industry disruption, existing healthcare providers, HRE investors and developers will be forced to adjust their business models to fit the new status quo. This includes the current trend of outpatient migration, where patients prefer to seek outpatient services from smaller, more localized providers rather than large healthcare campuses.
Ongoing Effects from the Tax Cuts and Jobs Act
H.R.1, colloquially known as the Tax Cuts and Jobs Act, is likely to continue to affect the healthcare industry indirectly by changing the insurance market and the regulations surrounding medical practitioners. Though it was signed into law in December 2017, the effects were not all immediate in 2018 and will be seen in 2019 as well.
One of the largest impacts the law is likely to have on healthcare in the United States is an increase in uninsured people. In 2019, the individual mandate put forth by the Affordable Care Act will be reduced to $0, effectively eliminating it. Estimates from the Congressional Budget Office and Joint Committee on Taxation suggest that with the repeal of the individual mandate, 43 million people under age 65 will be uninsured by 2026.
Treatment and care provided to uninsured individuals will play a large role in all healthcare-related investments in 2019, including healthcare real estate. Affordable, value-based care options will be showing up more frequently, catering to the need for healthcare without insurance.
High Demand for Healthcare Real Estate and MOB Investments
Despite relatively low development numbers, the demand for healthcare real estate is likely to continue rising in 2019 due to the stability of the investments. Healthcare facilities are seeing increasing demands for service, leading to stable cash flow and opportunities for growth. Coupled with the U.S. Census Bureau’s estimate that retirement-age adults will outnumber children under the age of 18 by 2030, healthcare providers will likely see more investment in the industry over the coming years to accommodate the needs of aging baby boomers.
Cap rates in 2019 are not expected to rise significantly, even as the Federal Reserve has increased interest rates over 2018. Further increases in interest rates in 2019 are uncertain, though expected later in the year. However, the high demand for HRE investment and the constricted supply of new investment opportunities is expected to manifest in further price increases.
Consolidation of Medical Care Facilities
As previously mentioned, medical office buildings are becoming more common and are receiving more investment than ever before. Consumers prefer MOBs that house complementary caregivers rather than dealing with large hospital complexes.
This trend is visible even locally, where recent investments in tech-centered MOB startups in Tampa Bay are increasing. Through the Dreamit accelerator, 10 local healthcare startups received $12 million in funding. These startups range from direct healthcare providers to caregiver support and care coordination, demonstrating a greater focus on consumer-facing healthcare in the area.
With the changing landscape in healthcare, HRE investment will be expected to keep up with changing consumer mindsets and needs. Paying close attention to trends like these will be useful in identifying new opportunities as they arise and responding proactively to industry shifts.
This article was originally published in February 2019 while Carleton Compton was affiliated with Equity, LLC, before Healthcare Realty Group. Its forecasts, tax discussion, statistics, market examples, company affiliation, and property listings reflect the original publication date and may no longer be current.
