Q&A with Colliers’ Healthcare Expert Kuzmanovich

Healthcare real estate is such a dynamic sector, it’s hard to keep up. Connect Healthcare caught up with Collier’s Mary Beth Kuzmanovich to discuss the trends impacting healthcare today. As the firm’s national director of healthcare services, Kuzmanovich works with healthcare providers and investors across the country.

CONNECT HEALTHCARE: Both for-profit and not-for-profit health systems are seeing their profit margins squeezed by increasing expenses and decreasing reimbursements. How will this impact the way they manage their real estate assets?
KUZMANOVICH: The impact to real estate is in levels: financial, lease term, and consolidation. Healthcare systems are focused on expense reduction, so they are looking at leased locations to negotiate terms to lower rent, reduce operating expenses, limit rent escalators and identify ways to mitigate property taxes. For owned locations, they are looking at the highest and best use of assets, which can mean moving general office uses out of higher cost, on-campus or medical office buildings. They are also looking at longer term investments to reduce operating expenses at owned locations, for energy savings and operational flow improvements. Health systems are looking at shorter lease terms. While a new, build-to-suit location may garner a 10-year plus lease term, older and smaller locations are likely to get a one to three-year lease term or renewal. This can provide the health system with flexibility to vacate smaller, less profitable or efficient locations. As health systems acquire more physician practices, they are accumulating multiple and sometimes, redundant locations. To achieve greater savings on staffing expenses, health systems are looking at opportunities to consolidate practices to eliminate superfluous positions and to improve efficiencies.

CONNECT HEALTHCARE: Many large health systems have announced that telemedicine will play a big role in their future growth. Is the healthcare real estate sector ready for telemedicine?
KUZMANOVICH: This ongoing trend is certainly impacting medical office practices, providing ways for patients to access care without physically going to see the doctor, and ways for physicians to consult with each other electronically. The impacts on medical office real estate are certainly tied to the built environment, with the need for space that can accommodate the technology.

CONNECT HEALTHCARE: New research shows links between mental health and a number of chronic conditions including obesity and opioid abuse. Do you expect healthcare systems to place a greater emphasis on mental health services, and if so, how will that impact the way they use real estate?
KUZMANOVICH: Health systems are integrating behavioral healthcare into their outpatient medical office practices and ongoing service delivery. The real estate impact is on the space design, to allow for appropriate privacy, group treatment activity and integration with other primary care practices.

CONNECT HEALTHCARE: Replacement hospitals and cancer centers seem to make up the bulk of current development activity. What trends do you see in healthcare real estate development?
KUZMANOVICH: Vacant hospitals and what to do with them should be one trend to watch. As health systems consolidate, there is overlap and redundancy in hospital service areas. With the cost to operate, renovate or replace a hospital, health systems are looking at options to close unneeded hospitals. A number of them can be repurposed for healthcare operations, but the rest will need to be redeveloped for other uses, which will be a challenge. There is little spec development in the medical office sector, which is another trend to look out for. Developers and investors are requiring higher commitments for lease space before building new facilities. In addition, the costs are being driven by competition for construction labor and subs from other hot real estate growth markets, especially apartments.

For questions, comments or concerns, please contact Jennifer Duell Popovec