By Matt Myers, Strategic Advisory Services Associate
The evolution of healthcare technology, ideology and regulation have changed the fundamental requirements of a hospital facility. New technology can help improve patient care through better treatment, increased efficiency and faster delivery, all while reducing space requirements. An ideological focus increasing consumer preference towards ambulatory care is forcing competing systems to promote outpatient services. Meanwhile, a regulatory focus on limiting repeat visits can reduce demand for overnight beds.
Overall, as a hospital grows older, it becomes increasingly difficult for the aged facility to keep up with these changes and facilitate the modern healthcare mission. The reality for healthcare executives is that it is frequently more economically feasible to construct a brand new hospital than to continuously pump capital into an aging facility. The problem that emerges from this reality is that healthcare systems are left with a surplus real estate asset that has limited value in its current state, continues to require limited maintenance expenses, and perhaps requires a reincarnation to a new highest and best use (“HBU”).
Determining the HBU of an obsolete hospital facility is a project that balances market demand with community need and then weighs the financial return that could result from a variety of repositioning scenarios. Many considerations can arise during the repositioning of the hospital. For instance, the real estate or existing improvements may still be under debt. The projected capital improvements budget may impact the desired project timeline. Perhaps the physical structure or zoning designation may create unique benefits. An added wrinkle to the entire process is the inevitable public scrutiny that emerges when access to local healthcare changes.
When done responsibly, the decommissioning of a hospital can generate considerable benefits. Financial return from the project can help the health system invest in its future care delivery model. Additionally, the real estate provides the system with an opportunity to enhance its legacy with the local community. Facilitating the transition of a surplus corporate asset into either a vibrant community center, or modern residential facility, or complementary health and wellness center or any other viable use identified in an HBU study, can strengthen the bond between the health system and the community it serves.
Best practices in determining the HBU of a decommissioned hospital facility are to follow a structured process that includes:
- Evaluating the possibility of salvaging any of the existing asset;
- Conducting a market demand study;
- Interviewing stakeholders, and;
- Modeling various HBU options based on results
Eventually, the project team is left with a short list of feasible repositioning options for a decommissioned hospital that has buy-in from the community, will be attractive to the development community, and has the opportunity to maximize financial return to the health system. Hopefully, the end result is a development catalyst in the local community, a source of capital to fund health system operations and a strengthen bond between healthcare provider and patients.
Matt is a member of the Strategic Advisory Services team in Baltimore, MD. Matt focuses on providing comprehensive consulting, advisory, and transaction management services to clients. Through detailed trend, economic, and real estate analysis, Matt enables the client to build and execute a real estate strategy that drives future business growth.