Lack of systemness in healthcare real estate and facilities is inhibiting ability to achieve economies of scale

CHICAGO, July 19, 2021 – As many healthcare systems have yet to adopt a holistic approach to the real estate aspect of their operations, the pandemic highlighted the need for systemness to help achieve greater patient access and care delivery. For many health systems, real estate is overseen by individual hospital or outpatient facility leaders, causing healthcare organizations to miss opportunities that manage costs, improve care coordination and support patient access.

Defined in the JLL Midyear Healthcare Outlook, systemness is the coordination and leverage of service lines, facilities, regional divisions and stakeholder groups to operate in a way that is optimal for the health system organization as a whole—with the overall objective to provide better care to more people at lower costs.

“The pandemic illuminated just how important a truly integrated healthcare system is in meeting these goals,” said Richard Taylor, President, JLL Healthcare Solutions. “Real estate can be a means to achieve greater benefits of systemness, and real estate asset performance can be improved by a more systematic operational approach. It’s a mutually beneficial relationship that improves value for both owners and occupiers in the long run.”

Healthcare systems must balance the swell of demand for services and increasingly rising costs. In 2020, Medicaid enrollment reached a new record, driven by increased demand from those impacted by pandemic-induced job losses, and bolstered by a federal boost of 6.2 percent in funding toward these state programs. The aging baby boomer demographic is also driving demand for healthcare services today, but millennials are the largest demographic cohort in absolute numbers. The swell of demand for health services will grow as this group ages, and the better that healthcare systems can prepare for this coming wave, the better.

Access to care and insurance continue to increase, driving healthcare expenditures consistently higher. Further systemization of healthcare services can serve as a hedge against rising costs, protecting margins and providing better insight into the services that are driving costs. Healthcare spending per capita in the United States is higher than anywhere else in the world, averaging $11,582 per person in 2019 versus the second-highest per capita spend of $7,732 per person in Switzerland.

Care locations influence market brand perception, patient accessibility and acquisition, and overall care experience. Healthcare systems are increasingly employing sophisticated location strategies to determine new growth opportunities that align within broader integrated delivery systems to improve care. Location analytics can drive better insight into future growth opportunities and inform potential merger and acquisition (M&A) strategies at scale. While the large gateway markets will maintain size dominance, opportunity to scale in emerging growth markets is greater than ever before.

“Locational strategy relative to patients and competitors, and a network portfolio approach to care delivery are examples where real estate can really enable the benefits of systemness,” said Jay Johnson, National Practice Leader, JLL Healthcare Markets.  “It’s axiomatic that real estate that is more closely aligned to the mission and strategy of the health system is also more valuable, both to the health system as occupant of the property and to the property owner, whether that be the health system itself or a commercial real estate investor in the case of leased locations.”

Greater patient access will increase the relative demand for healthcare over time and drive additional real estate demand. In 2021, 49 percent of physicians reported working more hours than in 2020, with telehealth cited as one of several reasons. And according to industry estimates, total patient volume will increase by nearly 20 percent by 2030. Telehealth is an additional gateway to care that enables better access to care, especially for those in rural areas.

Longer-term, the adoption of telehealth will spur greater demand for medical care. Patients who may not have otherwise sought care now have an accessible gateway to the health system, driving greater demand for care, and consequently health system growth. The risk to long-term real estate demand may be greater on the administrative space needs side of the equation. More work-from-home flexibility for office workers post-pandemic could reduce overall demand for office space but have limited impact on the medical office landscape where clinical care and services are accessed.

Medical real estate transaction volume remained strong through the pandemic, a reflection of investor confidence in the sector’s long-term growth fundamentals despite the many challenges faced by the industry itself. The increasing sophistication and clinical acuity of outpatient services, coupled with expanding outpatient delivery models overall, are fueling sustained demand for specialized space.

Fundraising that targets medical office and healthcare sector opportunities is nearing $10 billion, a high relative to the previous 10 years. The amount of capital on the sidelines targeting the space will drive values for healthcare properties even higher as buyer competition heats up. Health systems can leverage this momentum to explore monetization opportunities in the current low-interest rate environment, but the window of opportunity will likely narrow in the next 12 to 18 months.

To learn more about JLL Healthcare, please visit: us.jll.com/healthcare.