A sweeping transformation is taking place in terms of where healthcare is being delivered. Vast hospital footprints are giving way to more convenient outpatient space, as consumers and payers seek affordable and accessible care.
The number of outpatient facilities jumped from 26,900 to 40,600 between 2005 and 2016, according to a recent report from commercial real estate firm CBRE.
Meanwhile, health systems are looking to keep pace with new competitors aiming to draw people from hospitals.
Reimbursement pressures and capitated payments are pushing people out of expensive care settings while technology is enabling more complex care in outpatient facilities and the home.
Those factors drove many systems to adopt a change in approach, such as Vanderbilt University Medical Center's transformation of about half of a struggling 900,000-square-foot Nashville shopping center into an outpatient hub.
Revenue has followed these trends, according to data from the American Hospital Association. Hospitals' net outpatient revenue was $472 billion in 2017, coming close to equaling inpatient revenue, which totaled nearly $498 billion.
This has fueled investment in healthcare real estate domestically and abroad.
Twenty years ago, healthcare real estate wasn't carved out as a separate sector, said Jeff Calk, a partner at law firm Waller Lansden Dortch & Davis. Demand has increased with the evolution of the industry, he said.
“Now portfolio managers want to have 8% in healthcare real estate, 12% in general office and 32% in hotels,” Calk said.
That makes sense given the outlook of other asset classes and markets, said John Claybrook, a partner at Waller. More people are working from home, which is softening the office market. Retail's upheaval isn't doing the sector any favors. A slumping oil and gas market as well as geopolitical turmoil involving what is the not-so United Kingdom, the eurozone and the Middle East have caused investors to look elsewhere.
“In comparison, healthcare real estate looks stable and profitable,” Claybrook said.
Weighted average occupancy for medical office space rose from 90.4% in 2009 to 92.3% in 2017, according to data from real estate firm JLL. Medical office returns offer a 2% premium over the broader office sector and are more than double the 10-year Treasury yield, according to JLL. That will likely continue as the aging population requires more care.