Of all the problems facing the U.S. healthcare system, real estate management may not be the most glaring. Nevertheless, the job of overseeing a widely dispersed collection of hospitals, medical offices and ancillary treatment facilities, both owned and leased, is an ongoing—and costly—challenge for large healthcare systems. While the issue isn’t new, it has grown increasingly complex in recent years, as provider real estate portfolios continue to expand and decentralize.
“The trend among large healthcare organizations has been to grow their number of physical locations, bringing services to where people live and work,” said Ky Chaffin, managing director of healthcare banking at BOK Financial®. “But the bigger the portfolio gets, the more challenging it becomes to maintain the facilities and manage costs effectively, which can negatively impact the organization as a whole.”
As health systems seek to balance financial stability with the best possible patient access and care, optimizing real estate assets is an important part of the equation. And, as many providers are learning, an experienced financial partner can and should be a key contributor to the process, Chaffin said.
Progress comes with side effects
Over the past two decades, America’s cities and suburbs have undergone a visible transformation in terms of healthcare availability. Not long ago, it was common for a large hospital campus to serve as a community’s central destination for a wide range of medical needs. While those landmark facilities still play an important role, today’s more integrated provider organizations have also pushed their services further into neighborhoods, establishing smaller outposts in the form of standalone emergency rooms, storefront clinics, outpatient surgery centers, labs and imaging facilities.
Enabled by a combination of technological advancements and growing consumer demand for hyper-localized services, many healthcare systems have been expanding rapidly for years. Today, they may have five-to-ten times as many locations as they did 20 years ago. While growth is typically good for business, and decentralization has undoubtedly brought more choice and convenience to patients, this trend is not without its drawbacks.
“Some healthcare companies find themselves saddled with a bloated, unwieldy real estate portfolio that is very expensive to manage and maintain. Aging or mismanaged facilities breed problems and require increased capital investment, and this tends to siphon capital away from other areas such as investments in technology and patient care.”- Ky Chaffin, managing director of healthcare banking at BOK Financial
Capital is key
Most healthcare organizations are acutely aware of the need to optimize their real estate portfolios, yet many are still struggling to define what “optimization” means to them. In some cases, it could entail improving or consolidating existing properties. In others, it might mean continuing to open new locations, albeit with sharper strategic focus. Leasing arrangements with third-party investors have also become an important part of an overall real estate strategy for many providers.
Even with crystal clear objectives, most organizations need financial support to bring their real estate plans to fruition.
“Capital is the lifeblood of any successful real estate operation, especially in healthcare,” said Chaffin. “So, building strong relationships with banks, financial advisors, private equity investors, REITs or other allies is vitally important for healthcare systems.”
With improved access to capital, organizations are empowered to take necessary steps to reduce risk throughout their existing real estate portfolio, renovate or repurpose facilities to improve operational efficiency, and acquire new properties when needed.
Start the conversation early
“More than just a source of funds, a commercial banker with deep healthcare experience can serve as an objective advisor on important real estate transactions,” Chaffin suggests while emphasizing the importance of bringing capital partners into the conversation early in the decision-making process.
“The earlier we’re involved, the more we can understand the client’s big-picture goals and offer the best mix of financial solutions to support them,” he said.
For example, ongoing relationships with capital partners who know the client’s business may help them secure more favorable financing terms for core assets on the balance sheet, while facilitating more flexible lease agreements on satellite locations.
It’s bigger than real estate
In practical terms, optimizing real estate assets with the help of an experienced commercial banker can help organizations reduce costs and foster financial health. But that’s not where the story ends.
“By unlocking capital and redirecting it to the programs that need it most, providers can more readily achieve their ultimate goal: providing the highest quality care, where it’s most needed, to as many patients as possible,” Chaffin said.
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