Growing popularity of telehealth casts uncertainty over CT’s stable medical office market

Like many hospital systems, Trinity Health Of New England has substantially grown its network of brick-and-mortar outpatient locations in recent years to bring its providers and services closer to patients’ homes.

But the trend of ever-expanding healthcare real estate may be coming to an end, says Trinity Health CEO Dr. Reginald Eadie, who oversees the four-hospital system, including St. Francis Hospital and Medical Center in Hartford.

It’s not just that property is expensive (operating leases cost Trinity Health about $24 million a year). It’s also because the practice of telemedicine has exploded during the coronavirus pandemic, spurred by the federal government’s decision to reimburse virtual doctor visits, through phone or video, at the same rates as if they had occurred face to face. Meanwhile, Connecticut’s Medicaid program has eased prior restrictions on audio-only doctor visits in response to COVID-19, while commercial health insurers, including Aetna and Cigna, have temporarily waived member cost-sharing for certain telemedicine visits.

Image

HBJ Photo | Matt Pilon

William Granruth, head of construction, Durham-based Medical Development Associates.

“Moving forward, why would we ever get in our cars in the middle of a work day to drive 20 minutes to a physician’s office when you can simply fire up your computer and do mostly everything, including to some degree a physical exam and getting prescriptions filled, while in your office?” Eadie said.

He likens the situation to a modern version of what happened during America’s last pandemic, caused by the Spanish flu, a century ago.

“The economy couldn’t support the overhead needed to have a practice in the community, so doctors started going to patients’ homes, knocking on their doors with a black bag,” he said. “Now we are going back to that future.”

Of course, it’s not possible for all healthcare services to be done remotely. Plus, for Eadie’s predictions to play out, it would require the Centers for Medicare and Medicaid Services (CMS) to make its telehealth reimbursement changes permanent.

There’s no guarantee that will happen, but with more patients having their first experience with virtual doctor visits during the pandemic, Eadie suspects it could be the push the system needs to greatly expand digital care and cut down on expensive real estate costs.

“My fingers are crossed that CMS will maintain reimbursement for virtual visits and we can get rid of the in-person visits,” he said. “We don’t need them, they’re a waste of resources, and it will help us start bringing down the cost of health care.”

A hospital system shrinking its physical footprint is just one way that COVID-19’s impact could ripple across the region’s real estate market, where health systems and provider groups are major economic drivers, occupying or developing significant space along commercial corridors and generating demand for medical office developers and investors.

In recent years, the number of walk-in urgent care centers has exploded in the region’s high-traffic retail stretches, and medical office buildings — housing specialty practices, surgery groups and other providers — have long been viewed by area developers as stable and worthy investments.

Medical office outlook

Eadie’s prediction comes amid a time of much uncertainty for the region’s real estate market. Restaurants, which are set to reopen on a limited basis, may suffer a prolonged downturn due to dwindled consumer confidence, and some retailers were struggling before the pandemic hit.

In some ways, healthcare tenants appear better positioned to come out of the crisis in a relatively strong position. They tend to be better capitalized than the average retail lessee, and many still have demand for their services, or are at least anticipating a major backlog of business once the virus dies down.

Image

Nicholas Morizio, Hartford President, Colliers International

Indeed, a number of medical office construction projects that were underway when the pandemic struck Connecticut in March are still on schedule, with demand for the new space holding steady, area property developers and brokers say.

“A lot of the projects that were already on the books that are not complete will be completed and finished,” said Nicholas Morizio, Hartford president for property broker Colliers International.

However, leasing and other deals in the medical office pipeline have slowed, at least temporarily, Morizio said.

A recent U.S. assessment by Colliers’ national research department predicts that will be the case across the country, with fewer groundbreakings and more focus placed on repurposing other types of spaces, such as vacant retail, for health services.

William Granruth, head of construction at Durham-based Medical Development Associates, which is nearing completion of two new buildings at its Saybrook Road medical office complex in Middletown, said he isn’t worried.

The 50,000-square-foot expansion has already secured orthopedic surgery and dental groups as tenants.

“In terms of our development project, no, [COVID-19] hasn’t held us up at all,” Granruth said. “We think now more than ever the need for high-quality healthcare and facilities in the community are a necessity.”

Image

Photo | Contributed

Avon-based medical office developer Casle Corp. says the construction timeline for this 30,000-square-foot building in Winsted, which will be occupied by Hartford HealthCare, has not been impacted by the pandemic.

David Sessions, president of Avon developer Casle Corp., said his company’s construction of a 30,000-square-foot medical office in Winsted for Hartford HealthCare remains on pace.

Connecticut’s medical office market never saw major swings in demand one way or the other, Sessions said, adding he doesn’t think that will change moving forward.

Connecticut has an aging population that will continue to need healthcare services, many of which must be provided face to face.

”I don’t see, generally, a lack of growth in the need for medical services,” he said.

Still, the pandemic is unprecedented in modern times, so Sessions readily admits he can’t be sure.

“I don’t think any of us really knows yet,” he said.

Morizio said coronavirus will soften the overall office market in the region, but he largely agrees healthcare properties have a relatively stable future ahead.

“Medical offices are good here,” Morizio said. “That’s why the developers, especially the people developing for Hartford HealthCare and Yale New Haven, have been making plenty of money.”

Little turbulence so far

The early signs for the healthcare realty market have been good, according to Connecticut’s largest medical office landlord, Arizona-based Healthcare Trust of America, which owns approximately 30 buildings totaling more than 1 million square feet across Hartford and New Haven counties. The majority of its U.S. tenants are health systems, universities and national provider groups.

“The good news is that most of the physicians, … healthcare systems and most of the … tenants have ongoing businesses,” HTA’s CEO Scott Peters said during the publicly traded company’s first-quarter earnings call this month.

Image

New leasing has slowed during the pandemic, and Healthcare Trust has pressed pause on any new property acquisitions. It has also been granting concessions for early lease renewals over the past few months. Tenants, from small physician practices to large health systems, have appealed to Healthcare Trust for rent forbearance, but it’s a relatively modest amount — 10% of total scheduled rents owed over the next three months. Meanwhile, the company said it received virtually all of its non-deferred rent that was due in April.

“I think the [medical office] space is going to hold up very well,” Peters said.

The company, which entered the Connecticut market in 2016 through a $178-million purchase of a medical office portfolio from Casle, did not respond to requests for comment for this story.

While Trinity’s Eadie is gung-ho about the influence of telemedicine on healthcare real estate, there is plenty of disagreement over the extent of the potential impacts.

Healthcare Trust downplays the hype around the technology.

“I don’t think it replaces [medical office buildings],” said Peterson, who believes telemedicine will be a foot in the door for patients, many of whom will eventually end up in brick-and-mortar doctors’ offices.

If new medical offices are built, they may look a bit different on the inside, with waiting rooms laid out to promote social distancing between patients, said healthcare architect Ron Goodin of Phase Zero Design in Simsbury.

More practices may adopt separate entrances for sick patients, which is more common at pediatrician offices, he said.

Urgent care giant plays the waiting game

Walk-in urgent care centers have increasingly dotted Connecticut’s real estate landscape in recent years.

Amid all the activity, PhysicianOne has emerged as a dominant player in the urgent care space here. The Fairfield County-based company, backed by private equity and other investors, has grown its presence to 16 Connecticut clinics, and 23 in total when including Massachusetts and New York.

Most recently, PhysicianOne acquired New England Urgent Care, adding four locations in Greater Hartford to its real estate portfolio.

Image

Lynne Rosen, CEO, PhysicianOne

“We’ve been in a high-growth mode,” said CEO Lynne Rosen.

The company still has acquisition targets in Connecticut, but decided to halt its M&A activity as it assesses potential impacts of the ongoing pandemic.

“We certainly didn’t sign any new leases or close any new deals,” Rosen said of the time since the virus struck Connecticut.

Still, the long-term impact may be positive for PhysicianOne.

Real estate prices in the region have made it more difficult to open clinics in certain desired locations. COVID-19 could change that, if it deflates property values and demand in heavily trafficked areas.

“It may give us the opportunity to expand,” Rosen said. “You don’t want to wish misfortune on other folks. I think it will open things up.”

An earlier version of this story gave an incorrect job title for William Granruth.