CREJ - Healthcare Properties - July 2017
We’re back! The Colorado Springs medical office market is doing great. Colorado Springs continues to experience a decline in vacancy rates as the second quarter is ending with a total vacancy rate of 7.16 percent, down from 7.54 percent at the beginning of the year. As predicted, the first half of 2017 continues to show positive absorption along with increasing rental rates. It has been a long road to recovery; just four years ago the vacancy rate was 21.46 percent. While these numbers are an important synopsis for our region, the main focus and conversation among health care systems and hospitals revolves around the looming uncertainties of new legislations and the future of the Affordable Care Act. These uncertainties will impact future building plans and leasing structure, and set new trends that will inevitably change the way patients receive care along the Front Range. The first recognizable trend in our area is the decision to build and expand at existing sites rather than committing to newly built facilities. An example of this is the $110 million expansion of the Memorial Hospital North. Health care systems are as expense conscious as ever, and locating all departments centrally creates cost efficiencies. Ultimately, for community members, this is a positive change as each expansion is located on a campus with proven success and will allow for centralized services to be delivered more quickly and cost efficiently in the future. Additional considerations for health care operators include leases, which are now under scrutiny after the Financial Accounting Board published a new Accounting Standards Update in February 2016. Prior to the recent update, leases for health care assets were classified as “operating leases,” which had a minimal influence on the balance sheet of the tenant. In two to three years, depending on whether a company is public or private, entities will be under tougher scrutiny and likely will have to classify their leases as “capital leases,” thus treating the lease as debt on the balance sheet. Classifying leases as a capital lease has incentivized health care systems to consider purchasing property instead of leasing. Developers have been quick to recognize the change and are building sites with lease-to-own opportunities. Developers also have been able to recognize another growing niche in the MOB market: rehabilitation hospitals. Post-surgery patients are typically left with few affordable options. Hospitals also are faced with high readmission penalties for patients that were reemitted to the hospital due to preventable conditions. Rehab hospitals are full-time care facilities with state-of-the-art equipment in private rooms, rehabilitation spaces and even dining areas. The most notable developments of these newer facilities are taking place in Denver, with the hopes that more will find their way to Colorado Springs. The changing world of health care real estate is complex for patients, health care systems and commercial real estate industry folks. Health care systems and hospitals are ultimately a needs-based industry; but while they are caring for patients, the incentive for efficient operations by consolidating locations is impacting where patients are able to receive care. The legislative agenda before Congress will further impact the medical office market and establish new financial considerations for providers and patients alike. Stay tuned.