Hospitals adapt real estate to fit new normal after COVID-19 Health systems are reassessing their real estate portfolios as they prepare for a post-COVID- 19 environment that will likely feature more home-based care and remote working arrangements. Hospitals have been acquiring physician practices and merging with other providers, boosting the already significant amount of square footage they manage. But as the pandemic reshapes care delivery, health systems will likely reconfigure and pare down their brick-and-mortar space, real estate experts said. "When in history have health systems sent their entire administrative staff to work from home?" asked John Poulos, national healthcare director for commercial real estate management firm CBRE. "Everything is being assessed and reconsidered—it will come down to the utilization and efficiency rates of facilities." Minneapolis-based Fairview Health Services has temporarily closed some clinics, and like providers across the country it has postponed treatments unrelated to COVID-19. While that has significantly dented revenue, Fairview's mail-order specialty pharmacy business has jumped 20% to 25% over the past five weeks and its home infusion business has increased 10% to 15%, said Tim Affeldt, vice president of specialty/infusion pharmacy operations at Fairview, adding that the main bottleneck has been finding nurses. "I am not expecting the system to reopen all the clinics that have closed," he said. "It will be interesting to see what happens with commercial real estate post-COVID because I feel like we are living in a world where we will need less space." Health systems are considering consolidating some of their office space as more employees are expected to work from home permanently. While there will always be a need for in-person care, virtual visits are expected to reduce commercial real estate utilization, likely depending on how much of the temporary reimbursement and regulatory adjustments stick after the pandemic subsides. Nearly three-quarters of 317 chief financial officers across all industries surveyed March 30 expect at least 5% of their workforce who previously worked in company offices to permanently work remotely, according to a poll from the research firm Gartner. As for telehealth, more than 1 in 5 adults over the age of 70 said they've had a virtual visit or appointment via phone since the start of the pandemic, according to a new survey of 1,039 seniors conducted April 10-15 by NORC at the University of Chicago. Of those, almost half said the experience was about the same as an in-person visit while only 4% said it was "much worse." Centennial, Colo.-based Centura Health has seen its virtual visits jump from less than 100 a week to thousands, Centura CEO Peter Banko said. "I would love to see the government continue these payments for telehealth, but regardless I think this is the new normal. It will be hard to get people to come into hospitals and clinics, especially if you are in a vulnerable population," he said. "It has opened clinicians' eyes to a different way of doing things." Still, revenue is expected to take at least a 40% to 60% hit as elective surgeries are postponed. This could force some administrators to divest or repurpose their spaces, said Richard Taylor, president of the healthcare division at commercial real estate firm JLL. "Now that health systems are in a cash-strapped position, there may be more opportunity to divest underutilized assets," Taylor said. "But they need adequate analysis of their real estate portfolios so they can understand if they can have assets freed up, sold or better utilized." Real estate holdings are often an afterthought in merger discussions, which have remained active, experts said. The share of physicians employed by hospitals increased from 26% in 2012 to 44% in 2018, Medicare Payment Advisory Commission staff said during a November meeting. "But many administrators realize they don't have a strategically designed real estate portfolio," Taylor said. "The more forward-thinking providers are looking at performance and occupancy levels and asking if the acquired real estate fits and is right for them." The healthcare real estate market consists of an estimated $1.5 trillion in assets, and health systems own $1 trillion of that, according to a 2018 CBRE report. The top 50 owners of healthcare real estate in the U.S. included 34 health systems that owned $227 billion worth of real estate; about 40% of that was inpatient facilities. Operating and maintenance costs and rent account for 8% to 12% of hospitals' overhead, but they are often overlooked, CBRE said. More health systems will probably opt to lease rather than own their real estate to generate cash flow, CBRE's Poulos said. They may explore divestitures, consolidate or reconfigure their medical office buildings, which are often empty several days a week, he said. "Everything is on the table right now," Poulos said. "We have experienced a disruption in the healthcare industry like nothing anyone has ever experienced." Medical office buildings were actively traded from 2011 to 2017, particularly among real estate investment trusts that own many senior-living and skilled-nursing facilities. Since the pandemic, REITs have responded to higher-than-average operating costs and fewer admissions by bolstering liquidity, reducing acquisitions and putting off capital expenditures, Fitch Ratings analysts said. Going forward, hospital executives will need to spend more time on real estate management than they typically have, Taylor said. "The C-suite needs to take a hard look at its real estate portfolio going forward," he said.