How Will Healthcare Facilities Evolve?

A healthcare facility can embody a large selection of property, from simple medical condominiums and clinics to large, more complex, time-consuming and costly teaching and research centers. Large hospitals tend to have all of the diverse health care types that are often found in free-standing facilities. So, it is important for smaller facilities to send the proper message to its visitors, vendors, patients and staff. It is commonly overlooked, but the appearance of a medical facility provides insight about the organization, as well as the level of care that is administered. Evidence about the level of care begins at the entrance of the facility, the unloading zone, parking areas and direction signs. In most situations, the message sent is one of compassion towards the people who enter. This, and most tend to forget, is also for the employees who service the patients as attitude and behavior will cater respect and goodwill.  As for particulars, to name just a few, the finish, signage, entrance and hallway adornments should be coordinated and security features, visible yet not intimidating. Collective, thoughtful design from third-party may help to ensure the proper first impression is created and sustained.

The design of health care facilities is governed by several regulations and special requirements. It is also affected by lesser publicized circumstances and pressures. The most common of these are workforce shortages, reimbursements, malpractice insurance, physician-hospital relations, capacity, care for the uninsured, patient safety, advances in technology, and patient satisfaction.

Currently, the entire health care system is under enormous pressure to reduce costs AND become more responsive to its patients. The aging population consumes the greatest use of health care services, and, it is well documented that the percentage of the aging population is increasing significantly. At the same time, rapid technological advances, often involving very sophisticated electronic platforms and equipment, make more diagnostic and treatment procedures available to the public, more rapidly than in the not-so-distant past. From a layman’s perspective, information alone should assist to decrease health care costs, yet it is not.  Thus, medical facility designers are under pressure to reduce both construction costs and the costs of their design services, while compressing construction schedules AND still meet the highest quality standards. Not an easy job by any stretch of the imagination.

As cost pressures continue, health care facilities will find themselves in increasing competition for both patients and staff primarily due to a leaner budget. Yet, and it is widely recognized, the facility is one of the top requirements when attracting and retaining the best doctors and nurses, the most successful HMOs and insurance plans, and the most patients. Consumer buying decisions are based on cost, accessibility, quality of service, and, in terms of healthcare, quality of care provided. An aesthetically pleasing facility is a key aspect of the perceived quality of care.

Health care is a labor-intensive industry, and much of its labor is highly skilled and highly paid. Since 60 to 75% of a hospital’s expenses are from labor costs, a design that increases operational productivity or efficiency and reduces staffing needs can have a major impact on the bottom line.

Now, more than ever, the flexibility within a facility is key to keeping it from functional obsolescence in the face of changing needs and technologies. Healthcare facility needs are evolving rapidly, and the direction is difficult to forecast with any certainty. New equipment technologies, new treatment methodologies, changes in diseases, and changes in the patient population base all impact the facilities that house them. Inpatient care is steadily being reduced while outpatient services are growing. There is increasing emphasis on specialize care units and smaller satellite facilities rather than large, centralized facilities.

In the past, communicable diseases were the major health problem, and sanitation or cleanliness was the main characteristic of a healing or therapeutic environment. Cleanliness remains extremely important, but there is increasing recognition of the value of a pleasant, easily-understood, and non-threatening environment for patient recovery.  Good design in the health care setting starts by recognizing the basic functional needs, but does not end there—it must also meet the emotional needs of those who use such facilities at times of uncertainty, dependency, and stress.

The HIPAA regulations address security and privacy of “protected health information” (PHI). These regulations put emphasis on acoustic and visual privacy. While HIPAA does not regulate facilities design, its implications for healthcare facilities may affect location and layout of workstations that handle medical records and other patient information, paper and electronic, as well as patient accommodations. As of April 2012, a cardiology practice agreed to a settlement of $100,000 for HIPAA violation for posting patient scheduling on a public internet calendar (more info here).

As the movement continues from hospital-based acute care to outpatient care that embodies more holistic, preventative, and continuous care items for health and wellness, MREA is uniquely positioned to offer professional, experienced guidance for healthcare providers and lend its vast network of working relationships and real estate opportunities for administrative and investment interest.

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Bifurcating Commercial Real Estate…

…could get worse (or better). This truly depends on which camp you associate with regarding the economic divide that is now a larger topic of debate in our country.  As for policy that is directed towards a remedy, both political parties could not be wider opposed to proposed solutions from the other, which is certainly indicative of our political and economic divorce.

The dichotomy is evident throughout the consumer world. For an example, high end retailers such as Nordstrom are recording excellent profit, and the low end, Dollar Stores, is doing great volume.  As for the middle, JCPenney is laying off.

Apple has the highest market capitalization for a technology company (or any company for that matter) with continued pricing power, yet products and inexpensive technological innovations from Google continue to see enormous, reliable volume.  Yahoo and Blackberry are getting slaughtered.

From a real estate perspective, multi-family is witnessing increasing occupancy levels from above normal rental activity and, on the opposite end, high end homes are picking back up once again as salaries, stock market and stable investments are paying greater tangible and mental dividends.

Farm and shale land are all the buzz, with prices quadrupling during a recessionary period, yet large tracts of land unloaded by lenders are dirt cheap.  Midsize land tract owners and developers have had no place to hide, with speculative plays now in another’s coffers.

This all said, there remains activity in the middle and it is improving, which is absolutely essential for commercial real estate to fully function as a healthy investment consideration.  When the headlines such as ‘commercial real estate is gradually improving’ echo throughout, it is the middle where analysts tend to concentrate.  As for the high end, which I consider to be strategically located, newly developed, and freshly tenanted, it is going up, while the low end is dissolving.  The middle (aka. the fence) is falling on one side or the other.

As for our firm, we are well positioned to guide and administer needs of the small (combining forces), middle (established, seeking to compete in other markets or adopt new identity) and large (strengthening and capitalizing on current position); we have solutions for all.

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8 Brain Benders (from easy to more difficult):

Property sales prices may be $600 per square-foot tenanted and will likely continue higher.  What could change this trend?  Stronger Dollar.

Property sale prices may be $6 per square foot vacant and will continue lower. What could stop this trend?  Lower Oil Prices.

Lease Rates will continue improving.  What will change this trend?  More Problem Banks.

Rental concessions will likely continue to increase.  What will change this trend?  Mortgage Rates Moving Higher.

Tenants will begin to purchase buildings.  It is going to happen.   As for cautions, several purchases on high end will eventually suffer due to current and future price speculation and a small percentage on the low end with sacrifice their business principles for a real estate play that will weaken their competitive position in the long run.

CPI will likely remain steady.  What will change this outcome?   Stock market decreases significantly.

Buildout costs will continue higher.  What will change this trend?  Fannie and Freddie are officially taken over.

Eyesore buildings will continue to worsen.  What could change this trend?  REIT prices continue higher.

What Creates Demand for Office Space?

The demand for office space is a derived from a firm renting space as an input to the production of services or goods they provide to businesses and households in the local, regional, or national (and international) economy.

In most large metropolitan cities, the majority of tenants for office space are firms providing finance, insurance, real estate (FIRE), and other services, including primarily professional, business, and government services.  Within the Greater Houston market, industries such as oil and gas consume over 1/5th of the total office space, as well as medical, now close to 10%.  These growth industries have created boons in office space demand for our city.

Within a service sector, the following types of firms are office space users: advertising, computer and data processing, credit reporting, mailing and reproduction, legal and social services, membership organizations, and engineering and management services. Thus, if market demand for such services increases, demand for office space will also increase (to the extent that the additional demand for services cannot be satisfied by existing firms without using any additional space).

The aggregate demand of office space for a particular market refers to the total amount of square feet of office space demanded by all firms interested in operating within that market. This is the sum of the individual office space demands of each of these firm. The demand of an individual firm for office space depends on the size of the firm, that is, the number of its employees and the amount of office space used per employee.

Within this context, the total amount of office space demanded at the broad market level is determined by the number of firms utilizing office space, the size of each firm, in terms of number of employees and the amount of office space demanded by each firm. Actually, the aggregate demand for office space in a market is the product of these three factors (the number of firms times average number of employees per firm times square feet per employee). Also notice that the product of the number of office firms times the average number of employees per firm will provide the total office employment.

The greater the number of firms, the greater the average number of employees per firm, and the greater the amount of square feet per employee required by each firm, the greater the total amount of office space demanded within a market. Within this context, increases in aggregate market demand for office space can be triggered by…

  1. Increases in the number of office firms in the market
  2. Increase in the number of employees within the firm
  3. Increase in the number of square footage per employee

Increases in the number of office firms operating in the market can be triggered by economic, population. and/or income growth. Such growth will trigger increases in demand for services, which in turn will stimulate the growth of startup firms, and/or expansion of existing ones.  Economic growth of metropolitan markets still depends largely on how the national economy is doing, but variations are affected by a concentration of firms, unionization rates, wages, and corporate taxes. Predicting employment growth across metropolitan markets is more complex than simply recognizing the effects of these factors.

The second factor that determines total demand for office space is the average size of the firm, in terms of number of employees. This depends on the average productivity level in each industry. The term productivity refers to the number of workers required to produce a given level of output, or number of workers needed per unit of output. If firms in service industries find themselves in a position where they will need to use more workers to produce the same level of output, the average number of employees per firm will increase and demand for office space will increase too. Such a development would represent a decline in productivity, though.

The outlook for productivity declines and increases in the average number of workers employed by office firms is highly debatable, given a long-term trend of rising productivity. Normally, automation and technological advancements make each employee more efficient and more productive, increasing the output produced per worker and reducing the total number of employees needed to produce a given amount of output. Economists and real estate analysts have expressed fears that rapidly rising productivity (output per worker), due to advancements in technology and information processing, may limit office employment growth and demand for office space in the future. An alternate view is that most possibilities for dramatic improvements in office worker productivity have been exhausted.

Non-price factors that influence office space requirements per employee include the type of services provided by the firm, the growth prospects of the firm, and the profitability of the firm. Within this context, increases in the square-feet-per-employee requirements of office firms can be triggered by:

  1. Employment growth in service activities that require a greater amount of space per employee
  2. Expectations for faster growth in the future
  3. Increases in office firm profitability

The Medical Office Of The Future

One of the hallmarks of a well-designed office, today or tomorrow, is flexibility.  You want as much functionality as you can possibly get out of each space and use each space for as many purposes as possible.

For instance, a large room with lots of voice and data jacks or wireless and electrical outlets might be used for:

  1. Physician meetings, staff meetings or parties
  2. Group patient visits
  3. In-house health fair
  4. Staff or patient training
  5. Public meetings
  6. War room for disaster management or ad hoc project (medical record scanning prior to an EMR go-live)
  7. Conversion to workstations for a merger with another group
  8. Place to do group sports or college physicals, flu shot clinics, DOT physicals

In our opinion, the reception and waiting areas will get smaller as patients have less time and are less willing to wait.  Patients may not have to wait at all if you are sending them a text message or use social media to disclose when the doctor is ready to see them.  Some practices will not have waiting areas as patients will be escorted directly into exam rooms where the entire visit, from soup to nuts, will take place.  Instead of going to the lab, the lab might go to the patient.

Registration may be replaced by check-in kiosks that completely automate the process, including a vitals booth which takes the patient’s weight, blood pressure, oxygen levels and temperature.  Patients and their demographic and insurance information may be identified by fingerprints or iris scans. You may have a receptionist avatar greeting patients.

Fixtures are movable – storage cabinets are on wheels and not permanently attached to walls.  Any room can be an exam room, a treatment room, a test room, a procedure room, simply by moving the cabinet with the needed items and the machines, which will be handheld.

Providers’ phones are their everything.  Their mail, patient records, test results, journals, phone calls, and their family pictures are on their phone, so no need for excess space that is not utilized.

As always, non revenue-producing space is minimized and revenue-producing space is maximized.

The need for storage of paper (records, forms, etc.) is minimized because everything is digitized and stored on the cloud.  The need for staff workstations is minimized because many staff work for the practice from home.

Medical records are not viewed on computer screens, they are projected onto walls in any room, at any time.

Many patients are seen at home or in the nursing home, with the provider in the office using telemedicine technology or virtual office visits.

Medication samples will not be given at the physician office – they will be distributed at the pharmacy.  All medications will be samples (no cost) until it is established that it is the effective medication for that patient’s problem.

To view the rest of our post or physically experience a tour of the medical office of the future, please contact Robert S. “Bob” Lowery.