NAIOP New Jersey Panel Addresses "Health Care: Rx for Office Vacancies?"
Is the ongoing transformation of how and where health care services are delivered a possible cure for the tough-to-lease office spaces in New Jersey? A panel of experts addressed that question and more in a discussion titled "Health Care: Rx for Vacancies?" The event was the April chapter meeting of NAIOP New Jersey, the commercial real estate development association, at the Woodbridge Hilton.
"Although the pace of change in the healthcare industry has been dramatic, there are plenty more opportunities for a better outcome if developers, healthcare system decision makers and local officials collaborate on what's in the best long-term interest of the communities," said Michael McGuinness, CEO of NAIOP New Jersey.
To begin, panelists talked about the state of health care itself. "These are confusing and murky waters - what's going on in the market?" asked moderator Jeffrey Prezant of Cushman & Wakefield. "The system looks broken."
Affordable health care and the controversies spawned by "Obamacare" came under scrutiny. "The Affordable Care Act has generated a lot of notoriety," conceded William Colgan of Community Healthcare Associates. And the big picture is further clouded by industry-wide consolidation: "Hospital groups are acquiring physician practices, resulting in different health care plays," he said. "As a result, services have migrated out of hospitals - which is impacting commercial real estate."
For the health care providers themselves, "facility investment decisions have changed dramatically," said Robert Flieger of Ernst & Young. "Health care is moving more to a ‘hospital without beds' model, and more hospitals are closing, creating inventory. There is pressure to keep costs down and focus on outpatient care."
"When a hospital closes and becomes derelict, blight spreads," said Colgan. "The state really should have a plan to deal with that problem."
The unprecedented pressure on the cost of health care "is really the cost of health care insurance," said attorney Mark Manigan of Brach Eichler. He suggested that "Obamacare could go by the wayside in another election or two. The line between providers and insurance is completely blurring. Hospital systems are reducing their exposure, and the hospital is becoming less important in the health care continuum."
If vacant office space is the answer for delivering health care services, what do commercial real estate professionals need to know? The process begins with regulatory issues - a certificate of need, Department of Health licensing and the like, noted Colgan. "Municipalities are not equipped to grant approvals - the matter gets kicked back to the New Jersey Department of Community Affairs. The result is a time lag of as much as 18 months - the process is long and complicated to get through."
The issue is further complicated by two factors: Hospitals' acquisition of physician practices means property owners "are no longer signing leases with individual practitioners," said Colgan, which adds to the vacancy factor. And because hospitals are shedding services, "there are more opportunities on hospital campuses today."
"Know what you have, know what you need, determine your occupancy costs, and look for the opportunities to reduce those costs," Flieger urged.
"Health care has become highly complicated and wildly volatile - and there are huge opportunities to do business and add value," said Manigan. "Developers previously not interested in health care are now looking to get into health care."
"Health care providers will now go where they never considered going," said Prezant, noting again the potential offered by vacant offices, which amount to 20 percent of New Jersey's office product. For conversion, such buildings "need more IT, fiber and connectivity," he said.
Another target for health care: strip malls, noted Colgan, which have plenty of parking, visibility and easy access.
More hospital systems themselves are seeing real estate as a profit center, Prezant noted. "It is up to commercial real estate to educate the hospitals and get them to trust you in the new, more complicated health care picture."
And while the big health care picture remains murky, both from the standpoint of services, insurance and real estate, "chaos equals opportunity for commercial real estate," Prezant concluded.