Cascading changes in the healthcare industry and the current economic landscape are necessitating new real estate strategies for health systems as they manage cash and affect sustaining change. Though median hospital margins improved through 2023 and early 2024, according to Kaufman Hall, half of the hospitals and health systems are still operating at a loss despite the deceleration in wage growth and inflation. Interest rates have altered financing costs, and raising capital is more difficult today than just a few years ago. Further, health systems must contend with new entrants who are well-capitalized, nimble, and disruptive.

Owners investing in and operating their real estate portfolios as they did a few years ago are unlikely to realize expected value returns. Those who embrace these challenges and look to rebalance risk and return of capital assets will position themselves for success.

Healthcare systems should consider four potential trajectories for their real estate, identifying the best fit and re-evaluating, adjusting, and creating new portfolio strategies.

Systems re-examining inpatient and outpatient capital assets should consider restructuring leases, bundling leases, and divesting non-core assets. According to a 2024 Huron survey of 300 healthcare executives, leaders ranked redefining their portfolios and cost reduction/optimization as the top two strategies to confront market dynamics. Real estate costs comprise a significant portion of a health system’s budget, so rationalizing real estate portfolios and optimizing space can be a shorter-term solution to free up capital to be redeployed for patient care and other priorities. While health systems have always had to rationalize their square footage needs, there is now heightened emphasis on finding efficiencies and savings.

In this trajectory, real estate assets become highly streamlined. Assets are right-sized for changing strategic and operational objectives of the health system and continuously monitored for their performance and returns to the system. Tactics can entail exiting underperforming spaces before the end of the contract term, divesting owned and leased spaces, modifying existing lease agreements, or initiating sale-and-leaseback transactions to improve liquidity while reducing unneeded space. Each of these tactics has nuanced accounting requirements and outcomes that should be carefully analyzed before action is taken.

Ultimately, many healthcare organizations can reduce their real estate footprint by comparing the value of a department or service against its operating cost, the location of its providers and specialties, patient volume, size of staff, and care gaps. Increasingly, this will entail aligning the real estate approach with the health system’s strategy—focusing instead on value, not cost per square foot. Doing so will allow the organization to be more strategic about its real estate assets, make changes that improve operations, and enable the health system’s mission and business objectives.

Healthcare delivery is no longer just sequential but horizontal, vertical and longitudinal. Traditionally, care processes have been organized around episodic events, causing wasted time and unnecessary steps for providers and patients. Shifting to an expansive view of care, not only through the disease lifecycle but throughout a patient’s life, requires vertical integration (within the health industry) and horizontal integration (across health and other industries) of a broader set of venues and partners over a longer time frame.

In this trajectory, health systems begin to source partners and incorporate community nodes of care into their real estate portfolios, potentially moving to models of care hosted in environments that others may manage. Community nodes of care can exist in retailers, workplaces, schools, care centers, grocers, gyms, and even social and community events, provided that the branded environment and service experience can be physically extended to the node. In addition, recognizing the shortage of providers and the imperative to reduce operating costs, these nodes can be viewed as a cost-reducing shift in sites of care, rather than net new sites of care.

As providers continue to explore ways of meeting community needs, partnering with external players who excel in logistics and order fulfillment—such as pharmacies, durable medical equipment (DME) shops, and other amenities—can amplify convenience and care support. For example, hospital-based pharmacies can become increasingly specialized while most scripts are shipped directly to the home. DME and supplies can be coordinated prior to discharge and shipped to homes hours later. “Ownership” of these additional nodes could be largely or entirely via third parties—the healthcare system’s role is to ensure that these nodes are extensions of their brand. Designing these partnerships should factor into facility and experience design, as they will require coordination but may ease overall space requirements across the system.

In a re-envisioning approach, real estate portfolios become highly integrated networks of physical and virtual resources that support total and continuous health. Continuing disruptions from technological advancements and rising consumer expectations necessitate an omnichannel, consumer-led approach. This trajectory requires a balance between in-person and remote access to care, changing from a single encounter to a series of rapid touchpoints across multiple nodes—the focus of the portfolio shifts from footprint and geography to network and connectivity.

For example, a provider may supplement a multi-channel technology platform that guides patients toward wellness and resources with an extensive physical network of community care nodes. Chronic disease management is primarily handled through wearable diagnostic technology distributed to and demonstrated in the home setting, and total health is monitored in a multi-factorial way.

The omnichannel approach is supported by buildings designed as multisensory ecosystems whereby healthcare is integrated, unifying the home, health system and digital environments into a single experience. Acute care hospitals and ambulatory facilities may either go fully remote or only host spaces for specialized care, diagnostics and outpatient interventions that do not require additional services. A net reduction of physical plants and facilities may be possible and part of a sustainable cost-containment strategy for providers. It will be critical for healthcare owners to ensure that a consistent experience is delivered across all modalities—including its online presence, mobile solutions and physical environment.

Refocused real estate portfolios shift the paradigm of the hospital from the universal anchor of the health system to the final and highest-acuity specialty centers. Traditionally, we consider a portfolio of multiple ambulatory sites that ladder to an acute care hub and its satellite campuses. In a scenario where hospitals operate as specialist hubs, the portfolio may evolve to include an ecosystem of digital and community nodes, a reduced number of ambulatory centers, and access to a number of post-acute sites.

While important, geographic location becomes secondary to prioritizing care nodes that can provide dynamic, accessible, and convenient care anywhere and anytime. Ambulatory sites are selected based on access, disease prevalence, and consumer preferences. The hospital maintains a site presence, perhaps with a static or smaller footprint.

The defining feature of this trajectory is that basic primary and preventive care are no longer grounded in ambulatory centers—they have shifted out to the nodal network. For specialty care, tertiary and quaternary growth specialties also become largely nodal, selectively joining their primary and secondary counterparts. Thus, ambulatory care facilities evolved into referral centers for super-specialty care, major diagnostic modalities and outpatient interventional care. This trend results in two outcomes: Ambulatory sites are more centralized as they are no longer the highly distributed first line of interaction for the provider, and they are also more focused on high acuity care.

Author: Supina Mapon

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