Do hospitals need real estate partners?


Over the last few years, U.S. hospitals have continued to crank out construction projects at an amazing rate, despite tight budgets and a less-than-lively economy. Now, with the financial industry in perhaps the worst crisis in decades, I find myself wondering whether we'll see its like again. After all, credit markets will rebound somewhat, but lenders are going to remember this one for a long time.

Sure, hospitals are still following through on projects they had on the table, but two or three years from now, when those projects are out of the pipeline, they may find themselves painted into a corner, with no way of meeting their current strategic needs. After all, while some construction is part of the inter-hospital arms race--such as building high-prestige, high-gloss specialty centers--some of it simply addresses the changing nature of the business.

After all, without new construction, or at least renovations, how can hospitals retool their facilities to improve infection-control practices to beat back threats like MRSA, or improve their energy efficiency and institute green practices? How can they build the facilities they need to shift more of their capacity to outpatient care?

As I see it, hospitals will increasingly have to build new types of partnerships with real estate investment firms, something that isn't terribly widespread today, as far as I know. This is something that's already done in, believe it or not, the supermarket industry, another that has very high capital requirements, thin margins, high volume and a critical need to build out promptly when the right opportunity arises.

The question, of course, is how the deals would be structured, since there's no standard model for tight hospital-real estate investor partnerships and healthcare revenue models are so complex. And of course, having for-profit investors can get complicated in a non-profit world, though it can be done. But I believe the industry needs to solve this problem, as the bond market has been pounded into jelly, credit lines have evaporated and self-financing projects isn't a great option for most.

So, readers, what do you think? Does partnering up with real estate investors make sense as a means of keeping up your construction schedule? If not, what do you think the biggest down sides would be? - Anne

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