Multitenant Healthcare is a Full-Contact Sport

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By Carrie Rossenfeld

LADERA RANCH, CA—The disparity between what healthcare providers and healthcare real estate owners strive for requires delicacy and hands-on care from real estate professionals, Cypress West Partners principals Chris Cumella and Jeff Johnson tell Earlier this week, we reported on our interview with the principals about their firm’s latest medical-office building acquisition and what the investment market is like for healthcare. Here, we continue our interview discussing some of the greatest challenges and opportunities in healthcare real estate. Where is the greatest opportunity to add value to the assets you are acquiring, considering current healthcare industry trends and demands?

Johnson: Speaking from our portfolio experience, this almost goes back to the question about fragmentation of the market. We’ve had some acquisitions by individual owners who don’t have professional management, so there’s opportunity for there. Also, going in and understanding the leases and being able to charge rent appropriately based on what the leases say, as well as refining expenses, is a needed skill. There are opportunities with energy efficiency, so we’re looking at lighting retrofits since changing to LED makes all the difference and drives bottom-line revenues for owners. What are the greatest challenges?

Johnson: The market today is very different from what it was two years ago. At that time, we could have said that everything was slow and nobody was making decisions. We were doing one-year leases at a time, and it was a stretch to get that from the doctors. For the last 1.5 years, I wouldn’t say they have total visibility with what’s going on with healthcare—one doctor said in about three years he will have visibility, but he has to make decisions now. A lot of the doctors are partnering up in groups and selling out to the hospitals—that’s the biggest challenge. We’re seeing larger, chunkier users, and the average deal is between 3,000 square feet and 5,000 square feet, whereas it used to be around 1,500 square feet.

Cumella: With hospitals and hotel systems, it’s like asking a battleship to make a U-turn. If they start now, in a couple of months they may be about to turn around. They’re big organizations, and it takes them time to react. They spend much more time thinking about making decisions.

With institutional money in healthcare, there’s a cultural clash there, but which one is right? Hospitals are from Venus, and institutions are from Mars. While the industry is bottom-line focused, it’s not bottom line driven for hospitals, especially religious-backed hospitals. Their goal is to deliver quality healthcare to the community—that’s their mission and that’s their daily driver. It’s a different animal than big-box retail. What is the key to managing healthcare assets today?

Johnson: We have a lot of individual doctors in buildings, and it’s very personal for them. They write checks to pay rent. You have to pay attention to detail, understand their practice and what they’re going through. It helps to have a focus on that.

Cumella: These are high-traffic buildings. It’s not like everybody comes in in the morning and leaves at night. A medical-office building turns over parking spaces every hour, and patients are coming in from the early morning until late at night. It’s a high-velocity business. It can be overwhelming on the staff and on the building systems themselves. The difference between a regular office building and a medical-office building is like the difference between two cars that are both 2012 models, but one has 80,000 miles on it and one has 2,000 miles on it. They’re both the same age, but one has been used a lot more. You have to learn to work on that investment. Where is the greatest opportunity?

Cumella: The mom-and-pops don’t really have access to the same efficiencies as we do. That’s a place where the value of our expertise is recognized immediately by someone who needs it. Also, there’s this institutionalization of real estate, and not many could pass the acid test of working with an institutional owner. We can offer the best of both worlds: that mom-and-pop feeling with institutional capabilities. This space requires someone who can bridge that gap. Doctors are professionals, but as Jeff said, they cut their own checks. There’s fragility there, and you have to know how to handle it. How are healthcare providers being challenged today?

Cumella: Next to payroll, real estate is the second-largest line item on their balance sheet. It’s where reimbursements are getting cut. They need to find ways to be more efficient with real estate: through space planning, utilities and energy. Everything will be scrutinized over the next five years or you’ll be losing tenants. These are not passive investments—they’re not “set it and forget it.” Multitenant healthcare is a full-contact sport.