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Study: Rising demand for medical office facilities

The rising demand for medical services to treat aging baby boomers, combined with shifts in approaches to treatments to curb rising costs, will significantly increase the need for new and refurbished medical office buildings in the decades ahead, says a new report.

“The Outlook for Health Care,” published by the Urban Land Institute, a global nonprofit education and research institute, and Seavest, a real estate investment management firm, suggests the increase in investment and development activity involved in filling that demand will amplify the healthcare industry’s role as an economic development driver in many urban regions across the nation.

The report, authored by economist Gary Shilling, documents several long-term trends and drivers contributing to the demand for both a higher number of medical facilities and different types of products:

  • Baby boomers living longer and requiring a variety of services,
  • Technology changes necessitating retrofits or new development,
  • An increase in the number of people insured under federal healthcare legislation,
  • An increase in healthcare-related jobs,
  • A shift toward more outpatient centers, and
  • An increase in doctors employed by hospitals.

“Both demand and supply factors point to rapid growth in spending on medical services and medical office buildings for many years,” said Shilling. “Medical care will continue to grow rapidly and steadily for two basic reasons – it is an essential human service, and it is heavily supported by the government."

“The same factors that provide the opportunity for our communities to make healthcare a cornerstone of economic development also argue in favor of the investment potential of healthcare real estate. Facilities of all types, but particularly medical office buildings and specialized outpatient facilities, will be needed as healthcare providers build out their networks and organize to provide cost-effective healthcare,” said Jonathan Winer, executive vice president of Seavest. “Healthcare providers will look to investors to help fill this real estate need, and the fact is that these properties have proven to provide reliable cash flow and investment returns and to perform well during both good and bad economic times.”

The report details the trends and drivers that will reshape development of medical facilities, leading to more buildings and different building types:

  • People over 65 have three times as many office visits per year as those under 45. The oldest of the baby boomers are now turning 65, the youngest will be 65 in 2029, substantially raising Medicare and Medicaid expenses.
  • Technology advances are requiring “smarter” medical buildings, either new or upgraded, which will be financed largely by private investments.
  • 32 million more Americans will be covered by health insurance by 2019, an increase of 11 percent.
  • Increased demand for medical services is likely to create more healthcare-related jobs than is currently anticipated as a result of the healthcare reform law.
  • Cost control pressures from the government and employers will benefit large, profitable hospital systems with large campuses and expanding satellite facilities. Renewed growth in cheaper outpatient surgical and other facilities will also result from an emphasis on cost containment.
  • More physicians will be employed by hospitals than will be operating private practices, due primarily to increasingly cumbersome record-keeping requirements, cost containment measures and opportunities for higher salaries. The need for individual physician offices will decline as demand grows for larger facilities accommodating numerous hospital-employed physicians.
  • Medical office building demand is forecast to expand by 19 percent by 2019, 11 percent of which is related to the impact of the new law, and the remainder due to population growth and demographics.
  • Healthcare’s essential market character and robust government support will be stabilizing factors for associated real estate markets, and may protect these markets from deflation in future years.

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