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By Spencer Hayes | Agent in 36117

Uncertainty Gone, CRE Looks Ahead to Healthcare Sector Investment

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WASHINGTON, DC-Love it or hate—and there is plenty of company in both camps—the Patient Protection and Affordable Care Act means large numbers of uninsured Americans will enter the healthcare system. To be sure, the law stands for much more than that, of course; it was also crafted to put a lid on rising health costs, and there is plenty of debate as to whether that will happen.

But for many in the commercial real estate space, the Supreme Court’s decision to uphold the law is good news for this fundamental reason: more people in the system will require more space to accommodate them. “It’ll have a positive impact on the real estate health care sector,” Jeffrey H. Cooper, executive managing director of Savills, tells GlobeSt.com.

“It’s good news, by and large,” says Todd Perman, executive managing director of Global Healthcare Services for Newmark Grubb Knight Frank.

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“Without question, the ruling brings clarity, and when there is clarity there is forward motion and investment,” Alan Pontius, managing director of the healthcare real estate group for Marcus & Millichap, tells GlobeSt.com.

Real estate healthcare asset owners are also cautiously positive about the ruling, at least if the viewpoint expressed by Debra Cafaro, CEO and chairman of Ventas, is any indication. “With today’s Supreme Court ruling, we expect to see a positive impact on some of our hospital clients, which could also improve trends in our on-campus medical office buildings,” she says. “Healthcare and senior real estate is a fragmented, $1-trillion market, and we continue to see opportunities to expand our business.”

Cafaro: "We expect to see a positive
impact on some of our hospital clients.

These views are hardly universal within the commercial real estate space--and even the above executives present nuanced opinions. Perman, for example, also tells GlobeSt.com he has reservations about how some of the developments are expected to unfold. Other industry players express downright angst over the decision. The National Council of Chain Restaurants executive directorRob Green said in a statement that the decision imposes costly burdens on—of all things—the chain restaurant industry.

“Throughout the legislative debate on the ACA and over the past two years, we’ve voiced the industry’s consistent concerns that the law would do significant harm to job growth and the economy. We’re afraid that continues to be the case as the industry braces itself for 2014.” For its part, the National Retail Federation issued a statement declaring itself dismayed at the turn of events.

One facet of the Supreme Court decision all agree upon—the uncertainty is over and companies can prepare, or brace themselves, as they see fit, for the coming changes.

“Activity in this area has been stalled as everyone tried to figure out where we were headed and what the rules would be,” Pontius says. In many ways, he adds, the health care sector – and its related real estate component—was due for a shakeup without the law. “Supply-demand dynamics were pushing for change. And there is definitely a correlation between that and real estate. Increasing demand requires the pressures to be addressed with the expansion of medical services.”

Pontius: "The ruling brings clarity,
and when there is clarity there is
forward motion and investment.”

There will be ongoing challenges of adapting to the law and of figuring out how to balance reimbursement with patient cost and insurance coverage, Pontius adds. “But now practices and hospitals can make decisions with their eyes open wider, and that will stimulate and increase leasing velocity.”

The industry is definitely going to see growth and momentum as it prepares for a new volume of patients, Perman says. What is unclear is exactly how that care will unfold.

“Clearly we’ll see a trend of off-campus care and the development of accountable care process,” he says. The healthcare CRE sector can expect to see a reuse of buildings and a thirst for more capital, he says. New construction as well will occur, depending on the market. “It will all depend on where the patients are and how a particular market will deliver care to them.”

Savills’ Cooper says that companies have been thinking along these lines from the beginning and preparing for many different scenarios. “The certainty of the Supreme Court decision means they can go forward with their strategic plans and formalize their budgets.” The commercial real estate industry will find plans from the health care sector for expansion or redeployment of assets become much more transparent as a result. “Now the landscape is clear and companies can proceed with capital plans to build.”

Not everyone is certain that more patients will automatically lead to more building, however. “I have never subscribed to the notion that medical office buildings would automatically benefit from the health care law,” Jim Kornick, principal at Avison Young, tells GlobeSt.com. “Don’t forget—the fundamental driver behind this law is to cut costs and slow the rate of health care expenditures. To me that means doing things differently. It doesn’t mean doing it in brand new space.”

For more thought leadership from Marcus & Millichap Real Estate Investment Services, check out"StreetSmart," a blog by Hessam Nadji, the firm's managing director of research and advisory services. The blog provides Thought Leadership positions on a variety of commercial real estate-related issues. Click here to watch Nadji on CNBC's "Realty Check" program talking about multifamily and the housing crash. For more information on the Thought Leadership program, contact Scott Thompson atsthompson@alm.com.

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