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Strategic Real Estate Planning for Healthcare Systems Starts with Five Pivotal Considerations

Jones Lang LaSalle identifies key components that shape comprehensive master plan

CHICAGO, Jan. 31, 2012 — The role of strategic and system-level capital asset planning has never been more critical in the healthcare industry as hospitals and healthcare systems embark on modeling their new clinical and financial futures. In light of the financial pressures of healthcare reform and with the movement to ‘accountable care’ as a response, Jones Lang LaSalle’s healthcare solutions group suggests five key areas that should be part of a strategic real estate plan.

According to Scot Latimer, managing director and leader of Jones Lang LaSalle’s Capital Asset Strategy practice for healthcare, these five opportunity areas, when viewed together and from the perspective of executive system leadership, form a comprehensive picture of the organization’s current performance and a roadmap to improve it:
  1. portfolio optimization, 
  2. occupancy cost management (which includes energy cost control & carbon footprint management), 
  3. ownership strategy, 
  4. execution approach, and
  5. organizational effectiveness
“Success will be measured by an organization’s willingness to scrutinize every square foot of its operation and determine how each component contributes; how each can be successful independently while also adding value to the whole,” said Latimer, who describes in this video how healthcare systems are using these measures to improve quality care. “Healthcare organizations that believe their current positioning and attitudes will prevail in five or 10 years may find themselves unprepared for the new healthcare environment in which they will be operating.”

A study recently released by Jones Lang LaSalle found that a more strategic and centralized approach benefits all areas of the healthcare real estate function – planning, design, construction, leasing and property/facility management – and results in significantly better overall financial and operational performance. Of the systems surveyed, those with a system-level strategic approach had an average operating margin of 3.89 percent – a full percentage point above the industry average. The ways that systems incorporate these strategies varies:

Portfolio Optimization – Portfolio optimization is the process of matching location and capacity with the organization’s overall business strategy, and it relates to all space owned or occupied by an organization as it pursues its mission. Portfolio optimization will be increasingly important as organizations seek to simultaneously broaden geographically and focus their reach and service mix in the future. As systems evaluate optimization they need to answer a variety of questions, including the location and use of their real estate assets and whether the assets align with the overall business strategy.

According to Latimer, “Such an assessment will help systems understand if their portfolio is correctly located and performing optimally in terms of throughput and promised return, and whether there is untapped capacity inside their own walls. It also represents a starting point for integrating long range real estate strategy with capital planning.”

Occupancy Cost Management – When properly managed, facilities can be a strategic partner in delivering sustainable cost savings and executing business strategies that dramatically improve operating margin. This requires access to best practices and processes which unlock the power of the whole organization. One significant consideration in this area is Energy Cost Control & Carbon Footprint Management

Healthcare organizations are enormous consumers of energy and other non-renewable resources. At every juncture in the real estate cycle—acquiring, managing and disposing of assets—there are opportunities to consume less energy.  As a part of any review and strategy development, resource consumption should be measured and a plan for active management developed.

“An energy and sustainability approach can significantly improvethe bottom line,” Latimer said.

Catholic Healthcare West, a 40-plus hospital system in California, Arizona and Nevada, drove down energy consumption by 26 percent and cut costs by $5 million a year with a tiered management approach. During the next 10 years, the system is targeting another 20 percent reduction in energy consumption.

“By centralizing energy management activities, the organization puts one eight-hour-day person a week on each site to ensure equipment is operating at pre-established set points. While there is an associated cost, the payback happened in year one (and increases over time),” said Jeff Land, vice president of corporate real estate, Catholic Healthcare West.

Ownership Strategy – Organizations recognize that various factors influence what must be owned, including competition for scarce capital, a need for future flexibility, and a finite and closing window on strategic opportunities. Many institutions now question whether they should own everything in their portfolio or if they should lease, or even shed some of those assets.

“The ownership paradigm in healthcare is changing as flexibility and speed to market become more important,” Latimer said.

One step healthcare systems take when centralizing real estate and facilities under a strategic plan is identifying and selling land and buildings that are no longer essential. In the past decade, for example, Baylor Health Care System sold all of its medical office buildings (MOBs) to a third party investor.

“We decided there was no sense in tying up capital in MOBs,” said Wes Huff, vice president of real estate at the $3.8 billion faith-based non-profit, which operates more than 10 million square feet of hospitals, surgery centers, clinics and other facilities in the Dallas/Fort Worth metropolitan area.

Execution Approach – Paramount to the success of a well thought-out strategic plan is its pairing with a strategic execution plan. According to Latimer, an effective corporate real estate organization is action-oriented, anticipating rather than reacting to the next move.

“Buildings must be purchased, built, renovated, and maintained, and resources – from energy to supplies to services – must be acquired,” Latimer said. “Repetitive transactions are opportunities to leverage the scale and buying power of the entire organization and work in partnership with the best and brightest service providers to achieve great outcomes for patients and staff.”

Conversely, there are also places where organizations place themselves at risk if relationships or the transactions themselves are not consistently and thoughtfully managed.

Organizational Effectiveness – Best practices in corporate real estate management are often not applied in the health care industry. The specific technical problem represented by hospitals and the somewhat parochial nature of the healthcare industry have had the net effect of erecting barriers between the industry and corporate America on this topic. Yet there is much to be learned on the topics of asset management, efficient operations and precision in execution, and those organizations willing to look beyond their perceived boundaries have found a wealth of relevant examples.

“When healthcare systems work from a strategic or master plan for their real estate assets, decisions are optimized for the system as a whole,” Latimer concluded. “Moreover, the property strategy then facilitates the overarching business and clinical strategies of the institution.”

Jones Lang LaSalle’s Healthcare Solutions Group works with hospitals and healthcare systems throughout the nation delivering program management, strategic consulting, financial strategy, transaction and sustainability advisory services and facilities and property management.  Through its work, the Healthcare Solutions group drives efficiencies and enhances quality through the unrealized potential of real estate assets and infrastructure.

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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 70 countries from more than 1,000 locations worldwide, including 200 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 $47.9 billion of assets under management. For further information, please visit our website,