The Pressures Being Placed on Hospitals and Health Systems

The world has changed drastically from the start of the 2020 to now. The COVID-19 pandemic has shaken our reality; altered the way we live day-to-day and rocked an otherwise healthy economy. At this time, no one truly knows the impact this virus will have, but one thing we do know is that it will place pressure on the medical arena. In the weeks ahead, we will watch closely as to how the medical markets react and the emphasis it places on medical real estate.

Like everyone, our first hope is that this crisis ends quickly and the effects of it are minimal. But we do know there will be a market reaction and we will endeavor to keep you, the medical building community, informed.

Elective Surgery Impact

The immediate impact of this virus is most evident in the pressure currently being placed on the hospitals who are treating patients. Overworked staff, shortages of protective gear and overcrowding of beds is the norm as the number of COVID-19 cases continues to climb. In response to these stresses, many hospitals have cancelled profitable elective surgeries in order to accommodate patients in need of less profitable treatments for COVID-19. This will result in loss and revenue and a shift in capital. A recent study conducted by Strata Decision Technology estimates that without raising the reimbursement premiums for COVID-19 cases, health systems are projected to lose an average of $2,800 per case. Depending on their payer mix, they could potentially lose between $8,000 and $10,000 per case.

Loss in revenue will trickle down to impact the hospitals and health systems in the long-term. Increased demands and lack of capital will slow or halt new developments as companies re-examine costs and feasibility. Kaiser Permanente just recently announced they are cancelling their planned $900 million headquarters in Oakland, CA. The 1.6 million-square-foot building would have housed 7,000 consolidated employees from their national and regional headquarters. While this will impact new supply to the medical office market, it will increase occupancy in currently existing buildings; a silver lining for owners of existing medical office space.

As we continue to battle this pandemic, only time will tell what the lasting affects will be. Ultimately, we believe the biggest impact will be on the larger providers. Hospital systems are already dealing with issues of capital allocation such as replacing outdated facilities. This pandemic will further exacerbate those capital allocation issues. Despite these issues, we feel when it comes to healthcare real estate, it will continue to be a stable, long-term investment. Even with some short-term disruption, medical real estate is still in demand.  As in any investment, understanding and mitigating risk is key. If  you are looking to buy or sell medical office, let us help you navigate the hurdles.  Our team will be monitoring medical office stability in our markets and we will continue to send updates in this ever-changing environment.

This article was authored by the Northern California Healthcare Advisory Group consisting of Bill Swettenham, Eric Ortiz, Blake Bouldin, Tyler Nielsen and Bre Cusick.