Despite the Pandemic’s Effect, Healthcare Developers are Busy and Optimistic
Despite some delays and postponements of projects during the early months of the COVID-19 pandemic, a group of executives with some of the leading healthcare real estate (HRE) development firms are saying things are picking up.
In fact, most of the developers who took part in the annual meeting of the Editorial Advisory Board with Healthcare Real Estate Insights, a publication that covers the HRE sector, said they are as busy as ever and their project pipelines are strong, at least for the next year or so. HREI’s editorial board meeting was held as a virtual, online event in mid-November.
The editorial board members involved in development added that projects are coming from both health systems and physician groups looking to grow or build newer, modern facilities in which to serve patients. Projects are coming both directly from long-time clients as well as through the request for proposals (RFP) process, the developers said.
Todd Varney, chief development officer with Denver-based NexCore Group LP, one of the sector’s most prolific development firms, said “if you would’ve asked me in March and April how I think things were going to go, I probably would have been pretty bearish on the year.”
However, Mr. Varney said that while a “handful of clients did pump the brakes” on projects early on during the pandemic, “I would say that by July and August those came back online and we’re on pace to break ground on about … $150 million (worth of projects) on the MOB side…. It was really interesting to see in early August, at one point, we had six RFPs (requests for proposals) in our hand at one time. Thinking back over the past 20 years, I can’t remember having six RFPs at one given time.”
James A Schmid, managing partner and chief investment officer with Anchor Health Properties, an active investor, developer and manager in the space, added that “one of the biggest surprises to me in the space this year is the (health systems’) continued desire to grow. I would have expected a lot more of our development projects to have been put on hold indefinitely, but I think that health systems recognize the long-term implications of needing additional space… There are healthcare-related needs out there that need to be addressed through new and modern facilities, and so I expect that to continue to be a big growth engine for the sector in the future.”
Several board members echoed Mr. Schmid’s comments about the health systems, adding that perhaps the pandemic is accelerating the need to provide even more services in off-campus locations. That way, hospital space can be freed up for potential patient surges, both during the COVID-19 era and any other future health crises.
Keith Konkoli, senior VP of real estate services with Toledo, Ohio-based Welltower Inc. (NYSE: WELL), agreed with this notion, adding that most of the growth experienced by health systems is likely to take place off of their main hospital campuses.
“We’re going to continue to be focused with our health systems on trying to partner with them to make that happen,” he said. “From a Welltower-specific side, I think we’ll continue to maintain the same level of development volume in 2021 as we did in 2020, and the same level we have consistently done over the past several years.”
Daryl E. Freling, managing principal with Dallas-based MedProperties Realty Advisors LLC, which partners with other firms in investing in HRE acquisitions and developments, said he, too, sees growth for the outpatient sector in years to come.
“A lot of the hospital systems suffered big drops in revenues in part because they had to shut down elective surgeries, which were often delivered inside the main hospital campuses,” said Mr. Freling, who added that MedProperties is poised for a “good year” in 2021.
“I think the pandemic has been a wake-up call,” he added, “as I think we’re going to see an accelerated shift to move electives in off-campus settings, single-purpose type of facilities, so that if another pandemic strikes and they have to shut down electives or keep beds open in their acute care hospital, they’ll still be able to deliver those elective surgeries in a special-purpose, off-campus facility.”
As NexCore continues to develop projects and respond to RFPs from health systems, whom Mr. Varney said realize the need to re-focus on their missions of expanding their market shares, the company is also fielding an increasing number of inquiries from physician groups, which he called a “nice surprise.”
San Diego-based PMB, a longtime MOB developer that has branched into other types of HRE facilities, was one of the companies that thought the “outcome caused by the pandemic could be terrible” for the company and the sector.
“But our construction projects held up just fine, with a couple of issues in Tucson on a project with COVID shutdowns,” said Mark Toothacre, president of PMB. “However, as it turned out we were able to complete all of our projects under construction, and on time. (And as we look) forward to 2021, we expect to get at least 350,000 square feet in four new projects in the ground. And, if all goes well, we’re looking at getting another one or two projects started towards the end of the year. So, we think our pipeline is looking really good.”
Mr. Toothacre added that PMB’s leasing retention rate in its MOBs is at an all-time high of about 90 percent so far in 2020. He also noted that new leasing activity has “actually stabilized during COVID… So, you know, sitting here today versus what I feared might have happened in March, we’ve ended up in really good shape.”
For yet another long-time, national HRE development firm, Jupiter, Fla.-based Rendina Healthcare Real Estate, the pipeline looks strong moving into 2021.
“Actually, we’ve got a stronger pipeline than we’ve ever had at Rendina, so we’re excited about that,” said Stephen K. “Steve” Barry, president of Rendina.
Mr. Barry noted that he participated in the meeting in place of EAB member Richard M. Rendina, the company’s chairman and CEO and whose wife had just delivered a healthy baby girl the day before the meeting. “We keep finding new ways to grow our team,” Mr. Barry noted with a chuckle.
Rendina’s current pipeline, Mr. Barry said, represents a mix of “RFP success and relationship-based business. I think if 2020 taught us anything, it’s that we’re not only in the healthcare real estate business but we’re in the relationship business.
While their pipelines look strong for the year ahead, some developers noted that health systems have not necessarily started planning for further down the road, and there could be a bit of a letdown in the number of projects planned for 2022 and beyond. But that could change as the pandemic fades, they said.