With hospital stays becoming more expensive, the federal government reducing the services it will reimburse, hospitals nationwide consolidating and fewer people traveling long distances for care, the physical spaces needed to deliver health care are changing rapidly.
For the construction industry, this means builders and developers have the opportunity to repurpose former hospital structures and develop ambulatory care centers, outpatient centers and medical malls. This trend can be seen across the country, and it shows no signs of abating.
This is especially significant in American shopping malls, where visitors are accessing outpatient health care along with retail, dining and entertainment. Retailers are increasingly affected by e-commerce, forcing them to find new tenants and uses for vacant space. Thirty-eight percent of urgent care centers are located in shopping centers, according to a 2014 survey by the Urgent Care Association of America.
Repurposing retail space for health care requires substantial renovations of the premises from one large space into a reception area, examination rooms, a waiting area and doctors’ offices.
Real estate owners and developers seeking to enter this space need specialized knowledge of medical office buildings (e.g., the layout and design, such as special ceiling heights, restrooms in each office, greater electricity supply for equipment, more water lines, and a reception area and waiting room for each medical office). This is unlike a large office space tenant with many occupants in a single space. Plus, the range of potential tenants for medical office buildings is different than prospective commercial users because it is reached through different brokers.
Construction executives also should keep an eye on situations where hospitals are closing up shop. With prospective patients increasingly traveling to the hospital of their choice, some medical centers’ best bets involve selling land for redevelopment. A recent example is the former St. Vincent’s property in Manhattan, which is now a luxury residential property. An ambulatory care center was built nearby and residents can go to other hospitals in the area.
Additionally, hospitals are merging into larger systems while smaller hospitals close and are replaced by “satellites” (ambulatory care centers surrounding the large institutions). The satellites are more user-friendly and accessible and less intimidating, which improves the overall quality of care, especially among people who would not otherwise seek preventative care or treatment. The buildout of such facilities presents opportunity, especially as health care systems with strong balance sheets show a willingness to enter into long-term leases.
Hospitals are in the business of delivering health care, not owning and operating real estate, but they can learn lessons from successful companies in other industries. Many years ago, Marriott split its hotel management and franchise business and removed the real estate debt from the management business. Hospitals can consider similar action, as hospital systems with good credit should be attractive to developers willing to build outpatient centers and ambulatory care facilities to suit for long-term tenants.
With services increasingly occurring in more local settings, great opportunities exist to repurpose old properties and construct new facilities that deliver health care in modern, creative ways. Construction executives need to stay abreast of these changes now and in the years ahead.
Kenneth A. Rosen is partner and chair of Lowenstein Sandler’s bankruptcy, financial reorganization and creditors’ rights practice. For more information, visit lowenstein.com.