Arjun's Overview of Healthcare Real Estate Development Issues

I’m a registered nurse (RN) with my Master’s of Science in Nursing (MSN) from Marquette University in Wisconsin with over 13 years of experience in healthcare and 23 years in entrepreneurship since I was 7 years old, learning and working alongside my parents in their various businesses. I watched my parents develop commercial real estate and re-develop properties and took mental notes over the many years. They may not have developed healthcare real estate, but I took the foundational knowledge I learned with them and asked the builders who worked with them how they did things and the steps they took along the way to develop their end-product properties. While many see only the tip of the iceberg of property development at the final product, not many know of the issues and situations that can arise on the road of getting to the masterpieces that we see on ribbon cutting day. Healthcare real estate development faces several significant challenges that developers, investors, and operators must navigate. Here are some of the biggest issues in this sector:

1. Regulatory and Compliance Challenges:

• Complex Zoning and Land Use Regulations: Healthcare facilities often face stringent zoning laws, especially in residential or mixed-use areas, which can delay or derail projects. Be aware and in tune with the local zoning and land use regs.
• Licensing and Accreditation: Healthcare facilities must comply with numerous regulations related to licensing, accreditation, and operational standards. Meeting these requirements can be time-consuming and costly. Sometimes projects are left dead in the water and are deserted because of poor calculation of holding costs for the interim time until licensing can be achieved.
• Health and Safety Standards: Stringent health and safety standards, including infection control, patient privacy (HIPAA in the U.S.), and accessibility requirements, add layers of complexity to the design and construction process. Having been in healthcare for 13 years +, I can assure you these standards are highly regulated with non-stop education and reinforcement to all parties involved even after development.

2. High Development Costs:

• Specialized Construction Requirements: Healthcare facilities require specialized construction materials and systems (e.g., HVAC systems for infection control, advanced imaging suites) that significantly increase development costs.
• Rising Material and Labor Costs: The healthcare sector is not immune to broader market trends like rising costs of materials and labor, which can impact budgets and timelines. The costs of labor and materials can play a huge role in healthcare development as the economy’s status and availability of materials in the supply chain can cause time delays.
• Technology Integration: Integrating advanced medical technologies and infrastructure (e.g., telemedicine, electronic health records) into the facility increases both initial capital expenditure and ongoing operational costs. When working with electronic health record (EHR) companies like EPIC, MatrixCare, Cerner, these costs are part of the technology integration operating and expenditure costs. Just the programming of an EHR to a single computer can be as much as a downpayment on a house depending on the EHR brand.

3. Financing and Investment Risks:

• High Capital Requirements: Healthcare real estate projects typically require substantial upfront capital, and securing financing can be challenging due to the long timelines and specific risks associated with healthcare facilities. As money talks, and BS walks, it’s a sad truth that some projects don’t go to development due to the significant capital requirements even just upfront and the timelines needed.
• Investment Risk: Changes in healthcare policy, reimbursement rates, and market demand can affect the profitability and stability of healthcare real estate investments. Policies in healthcare change so often, it can be hard to keep up sometimes (speaking from frontline experience). Reimbursements and healthcare coverage are not always easy to coordinate from insurance companies from the patient’s end or from the healthcare facility’s end, sometimes causing delays in care, delays in payment, and uncertainty for investors as I have also seen across the years.
• Valuation Challenges: The specialized nature of healthcare facilities can make it difficult to assess accurate property values and ROI projections, complicating investment decisions. Uncertainty is the name of the game as some individuals are not comfortable with the risks associated with healthcare investing, especially if they’re new to healthcare investing.

4. Market Demand and Demographic Shifts:

• Shifting Demographics: The aging population increases demand for certain types of healthcare facilities (e.g., senior living, long-term care), but demographic shifts can also lead to overbuilding in certain areas, affecting occupancy rates and returns. This is why proper market analysis and due diligence is necessary to get the best picture of demographics.
• Evolving Healthcare Delivery Models: The rise of outpatient care, telemedicine, and home healthcare services is changing the demand for traditional inpatient hospital space, requiring developers to adapt their projects to these trends. As the age of technology advances, especially with telehealth, etc, inpatient visits are trending down, reducing possible needs for such large developed spaces.

5. Location and Accessibility:

• Proximity to Population Centers: Healthcare facilities must be easily accessible to patients, which often means securing prime real estate in densely populated or underserved areas. Competition for these locations can be intense and costly. Real estate is founded very much so on the concept of “location, location, location”, so finding these areas is tremendously important.
• Transportation and Infrastructure: Ensuring adequate transportation access and infrastructure (e.g., parking, public transit) is critical for healthcare facilities, particularly in urban settings. In this day and age, transportation isn’t as difficult as it once was, however it can be burdensome for some patients, such as patients who are not fluent in speaking English. Maybe the patients are physically incapable of getting a ride for their appointments or procedures due to impairment of their ability to talk, hear, or see for example. Having strong relationships with local transportation companies can provide support when contemplating healthcare development plans. Find out from transportation companies and local regulations about their capabilities and infrastructure they might need for the safe delivery of patients from a building structure perspective, such as heights of ambulances, buses, etc.

6. Sustainability and Energy Efficiency:

• Environmental Impact: Increasing pressure to meet sustainability standards (e.g., LEED certification) adds complexity and cost to healthcare real estate projects. Leadership in Energy and Environmental Design (LEED) certification allows for efficient energy usage for a building.
• Energy Consumption: Healthcare facilities are high consumers of energy due to the need for 24/7 operation and specialized equipment, making energy efficiency a critical but challenging aspect of development. To resolve this, the implementation of high quality insulation, energy efficient windows, and reflecting roofing materials can provide great solutions. LED lighting, IoT sensors and automation, energy efficient HVAC systems, solar panels, smart lighting systems, and? Energy-Star rated equipment are among some of the plausible solutions for sustainability and energy efficiency.

7. Operational Challenges:

• Ongoing Maintenance and Upgrades: Healthcare facilities require regular maintenance and periodic upgrades to meet evolving medical standards and technology advancements, which can strain operational budgets.
• Tenant Stability: Ensuring that healthcare providers and tenants remain financially stable and can meet lease obligations is crucial, as vacancies in healthcare real estate can be harder to fill compared to other commercial real estate sectors. If a medical practice in a hospital isn’t getting enough patients, they may not be able to pay the lease month after month. That being said, tenant stability may fluctuate, creating gaps in payments.

8. Competition and Market Saturation:

• Market Saturation: In some regions, there is a risk of overbuilding healthcare facilities, leading to increased competition and lower occupancy rates.
• Changing Competitive Landscape: The healthcare sector is rapidly evolving, with new players (e.g., retail clinics, urgent care centers) entering the market, increasing competition for traditional healthcare providers. Competition can be a beneficial component in business, however if there’s oversaturation in a particular area, there is definitely higher risk.

These challenges require healthcare real estate developers to be highly strategic, leveraging in-depth market research, robust financial planning, and an understanding of healthcare trends to successfully navigate the complexities of the sector. Development of healthcare real estate comes with much to contemplate, however there is much to earn on such investments if well done and executed to a “t”!

Disclaimer: This article is for informational purposes only and does not constitute financial advice.

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