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Healthcare Systems Move into 2012 with Strong Capital Markets and Development Prospects while Aging Facilities Pose Operational Issues

Jones Lang LaSalle Details Healthcare Real Estate Conditions in 2012

CHICAGO, Dec. 21, 2011 — Healthcare reform will create a growing sense of uncertainty that will likely build in 2012. This will have an increasingly significant impact on strategic business plans for healthcare systems which will spill over into portfolio and cost rationalization activities and the allocation of capital at hospitals across the country.

According to members of the healthcare practice group at Jones Lang LaSalle, certain areas of the industry are in fact harnessing that uncertainty by planning medical office and outpatient facilities that foster physician alignment demanded by healthcare reform.  Jones Lang LaSalle team members predict planning will progress steadily forward over the course of 2012, moving from “talk” to action, at levels not witnessed in 2011.  Health systems with the capacity and resources see this not only as a necessary action to adapt to healthcare reform but as a competitive advantage acting as a first mover.

M&A Activity Plays into the Hands of Investor Appetite
One of the bright spots in 2012 will be healthcare capital markets activity.

“Hospital merger and acquisition activity will be a major theme in the healthcare industry in 2012,” suggested Mindy Berman, managing director, healthcare capital markets, Jones Lang LaSalle. “This activity involves not only hospital to hospital combinations with numerous permutations on the theme but also combinations with highly prized physician practice groups.  All of this M&A activity comes with a lot of real estate baggage.”

Merged healthcare organizations will look to create operational efficiencies and ways to rationalize their footprint to best serve their mission while reducing the annual capital spend.  The net result is planning for realignment of their real estate portfolios, as systems carefully evaluate how they are aligned with their business and operational strategies.

“As systems look to portfolio realignment to make the best use of their real estate assets, we will see strong levels of activity in the areas of dispositions, monetizations and sale-leasebacks,” Berman said. “Fortunately, there continues to be strong investor demand for healthcare related real estate, and we expect the product sector to remain much in demand in 2012 as the broader economy continues to struggle to re-energize itself. The proven track record of healthcare real estate through downturns and the compelling demographics of the sector will keep propelling activity and pricing levels throughout 2012.”

Among the most active investors in this segment are healthcare Real Estate Investment Trusts (HCREITs), which have a market capitalization of approximately $50 billion or 13 percent of the market capitalization of all real estate product types. More than $18.1 billion in debt and equity capital was raised by public HCREITs in 2010 and through November 1, 2011, which is substantially more than other larger property sectors.  HCREITs are the top income producing property type, generating current average dividend yields of 5.3 percent in contrast to industrial, office and apartment REITS producing yields of 3.8, 3.1 and 3.1 percent, respectively.

“While no asset class can be considered recession-proof,” Berman said, “based on past performance and future projections, healthcare real estate is be about as ‘recession-resistant’ as possible which makes it a preferred class today.”

Outpatient Care Opportunities are Areas for Optimism
With continued movement toward accountable care, the industry continues to experience ongoing evolution, away from the planning and development of in-patient facilities to outpatient and ambulatory care settings that offer greater community access and lower capital and operating cost.

“Healthcare reform, and the issues it faces, keeps uncertainty a constant theme,” said Shawn Janus, Managing Director of Jones Lang LaSalle’s healthcare development programs. “Very few systems, or developers, are prepared to go full bore with plans. The pipeline of new projects is more limited than when the economy was going gangbusters. The planning and financing processes take a great deal of time, so other than obvious requirements, the activity may be muted for some time.” 

The bright spot for healthcare development is outpatient facilities as hospitals and healthcare systems remain committed to expanding their footprints outside of their main structures and into the communities they serve.

The strongest side of the business from a planning and development perspective is in the outpatient arena, said Janus. “As we see accountable care embraced, we are seeing outpatient and community-based facility activity. That market is coming back, and the design and funding of these facilities is evolving.”

Noting that evolution, Janus said the 40,000-square-foot “doc in the box” used to be the model for the industry.
“Now, it is not unusual as you aggregate services from larger employed physician models, to see facilities designed and developed that are in the 100,000-square-foot to 200,000-square-foot and up range,” Janus said.  “This design and scale is more apt to attract capital and at lower cost levels than smaller and less creditworthy projects.”

Future planning for new medical office buildings will remain the busiest area of the business as hospitals and health systems look ahead, strategically, to have plans in place for when they can pull the trigger on a new project, Janus said.

Planning and Performance are Critical
As hospitals and health systems look to expand into the communities they serve, enhance operational efficiencies and ultimately improve the bottom line, the connection between real estate and operations will intensify, and planning will be even more critical to success.

“Hospitals need to perform better and increase throughput,” said Scot Latimer, managing director, of Jones Lang LaSalle’s strategic planning capabilities. “They also need to do it without expanding capacity. Therefore, one of the greatest challenge hospitals and health systems will face is doing more with less.”

According to Latimer, with all of the issues facing the healthcare industry—reform, the constriction of available capital, uncertain reimbursement, etc.—chief among the questions healthcare executives are asking is, “For which future should we prepare?” 

Deferred Investments Loom Large: Aging Facilities Face Operational Challenges
According to Latimer, healthcare executives face considerable investment-related decisions related directly and indirectly to the physical plant. 

In the absence of significant new development and in the face of the financial struggles caused by reimbursement cycles, the cost of funds and other factors, the industry’s physical plant continues to deteriorate. Many hospitals and systems across the country have had to defer maintenance issues or initiate short term fixes to delay the inevitable.

Average age of plant (an accounting measure relating accumulated depreciation to depreciation expense), according to Latimer, tells the tale; it has risen nationally all but one year in the last decade and is the metric which best predicts the health of our facilities. By investing more into the plant, even at incremental levels, an institution can buy down the age.

“Many institutions have had to ask—and will continue to have to evaluate—whether they are investing enough to at least maintain the average age,” Latimer said. “Unfortunately, the answer is no, which has created this looming overhang. We had hoped that with the investments of the last decade these problems would mitigate, but the steep decline in investment the last three years has us right back where we were 10 years ago, and the issue is not going away.”

Jones Lang LaSalle’s Healthcare Solutions Group works with hospitals and healthcare systems throughout the nation to drive efficiencies that release capital for maintaining and upgrading facilities while enhancing the quality of patient care.  By delivering facilities and property management services, project management, strategic consulting, financial strategy, transaction and sustainability advisory services, hospitals can driveefficiencies and release the unrealized potential of real estate assets and infrastructure.

About Jones Lang LaSalle
Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2010 global revenue of more than $2.9 billion, Jones Lang LaSalle serves clients in 60 countries from more than 1,000 locations worldwide, including 185 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.8 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with more than $47.9 billion of assets under management. For further information, please visit our website,