Physicians Realty Trust’s Dan Klein on the Post-Pandemic Healthcare Landscape

Ahead of Connect Healthcare Real Estate, taking place Sept. 27-28 at VEA | Newport Beach Marriott, Connect CRE is sounding out some of the experts who will be onstage for the conversation. On the institutional investment side, Dan Klein, SVP and deputy CIO for Physicians Realty Trust, discusses the lingering systemic effects of the COVID-19 pandemic and their impact on real estate.

Q: Operating costs are increasing for healthcare systems. How does this affect their real estate use?

A: No cost line item has escaped the past three years – operating costs, facility and construction costs, etc. Some line items have come down from their pandemic highs (staffing, some construction costs), but across the board, costs are up dramatically over the past three to four years. 

There is no one answer to how this affects real estate use and decisions. On the one hand, it may cause some healthcare systems to look for other strategies to raise operating or non-operating capital. One example would be selling core or non-core real estate to raise funds. On the other hand, some healthcare systems will try to tighten the belt and reduce operating costs, without pursuing disposition of real estate assets. If there is one commonality, most health systems are shedding non-core administrative space at a healthy pace. 

Q: With the pandemic now largely (but not entirely) behind us, what conclusions can we draw about its impact on how healthcare is provided?

A: Much like the coronavirus did to our population, the pandemic had an evil knack for attacking the weakness in our systems. Our front line healthcare workers were heroes, working tirelessly. Supply chain, staffing, and patient care under adverse circumstances became nearly unmanageable.  

The pandemic taught us a lot about what preparedness really means. One byproduct of the pandemic was the further realization that outpatient settings are a necessary and important component in the delivery network. Inpatient hospitals are mission-critical facilities. But, with access to those facilities severely constrained, outpatient facilities stepped up and met the needs. 

Q: Are we seeing more healthcare systems consolidate? If so, what are the implications for the real estate, e.g., will some of it become redundant?

A: It is hard to overstate the impact that three years of the pandemic had upon the entire healthcare system. Prior to the pandemic, most health systems were in various stages of executing strategic plans involving expanding service lines, or markets, or other growth vehicles. Those all came to a grinding halt during the pandemic – health systems were simply trying to survive, literally, and financially. 

Once the worst of the pandemic was over, health systems desired to restart their now three-year old plans. But, now the environment was different – populations shifted, staffing was challenging, facility and construction costs escalated. The previously already thin margins became unattainable for many. Health systems were in a difficult spot – wanting to grow but not being able to afford to do so.  

That is where many are today. As a result, there are consolidation transactions in process or in discussion. This will continue as health systems try to be creative in execution of their strategies. Some systems will look to third party capital, selling assets to raise funds to accomplish growth strategies. Some systems will continue to own their assets. All in all, I believe the result of this will be a modest increase in the number of health system monetizations. 

Q: Venture capital investment in healthcare appears to be on the rise again. What are some areas where VC is turning its attention?

A: Venture capital investment will always find healthcare attractive. Healthcare has so many permutations, from patient care to back-office/administration to supply chain. And within each of those are many opportunities. Venture capital and private equity has long played in the lower acuity spaces, and recently many have trekked into the more acute service lines such as orthopedics and cardiology. This will continue as so much money is being raised to chase return opportunities. 

Connect Orange County will take place Sept. 27, 2023 at VEA | Newport Beach Marriott in Newport Beach, concurrently with Connect Healthcare Real Estate on Sept. 27 and 28. Click here to register for Connect Orange County, and here to register for Connect Healthcare Real Estate.