2 min read March 2022 — Invest: joined Michael Seton, president and CEO of Sila Realty Trust, to discuss the opportunities and challenges in healthcare real estate in the economic environment, and how Tampa Bay is uniquely situated for the industry to thrive despite any challenges. “Land availability in a market like Tampa is less of an issue than some other major metropolitan locations as it’s more spread out in this region and, generally speaking, less expensive,” Seton told Invest:.
What are your thoughts on the emergence of repurposing as a strategy in real estate?
Sila owns approximately 125 properties in 28 states throughout the United States and we have seen this trend develop over the last decade, particularly in healthcare. In the healthcare industry, patients are the client, so meeting a patient’s need is part and parcel to the success of running any healthcare operation. We are seeing the “retailization” of healthcare real estate, particularly centered around population clusters and growing markets – again, to appeal to the consumer of the product, which, in this case, is healthcare services. When we research demographics, accessibility, and catchment areas, we discovered the most accessible sites for patients are often times former retail locations as they are in close proximity to residential neighborhoods – single or multi-family. The general retail industry has moved so much business to online and e-commerce, such that physical real estate locations have opened up and created opportunities to lease existing former retail sites to healthcare operators and develop new facilities, hence the “retailization of healthcare”. It’s extremely common today to see urgent care facilities filling in vacancies in heavily trafficked retail shopping areas, as we have, in fact, seen in our local market with our dominant healthcare systems.
What other significant healthcare real estate trends have you seen evolve?
Overall, healthcare facilities, as compared to 10 or 20 years ago, are much more efficient in terms of their design. We don’t see a lot of construction of the very large hospitals anymore – they are simply too expensive to build and are not the best settings for many services needed by the patient population. Many of the services that would have been otherwise delivered in those large hospitals are now being provided for in smaller, more accessible buildings, where the provider can provide a better patient client experience. These smaller, more efficient facilities, often consisting of outpatient or a combination of in- and out-patient settings, have become the “spokes” of the “hub”, whereby the hub is the large acute care hospital for a healthcare system, hence “hub and spoke healthcare model”. Overall, this model offers more efficient and affordable delivery care for lower acuity cases by keeping patients out of large hospital settings, which is the most costly form of healthcare delivery. To provide an example, if a patient has a need for a lower acuity surgical procedure, there is simply no need to go to a large hospital facility when an ambulatory surgery center can provide a better, more physically accessible, and lower cost experience. This approach allows physicians to deliver a higher quality of care in a potentially less infectious environment, and turn beds more quickly, all while allowing for higher case volume – ultimately, all crucial characteristics for keeping our overall healthcare costs lower in this country.
What challenges does the rapid influx of people to Tampa Bay present to the real estate market?
Although land prices are lower in the Tampa Bay region than many major metropolitan locations throughout the country, our land prices are increasing dramatically due to demographic trends affecting Florida, particularly resulting from COVID lockdowns elsewhere in the country and the vast majority of companies adopting a more flexible work environment through hybrid scheduling. In addition to these drivers, inflationary trends are high due to the easy money policies this and other countries have had over the past couple of years, be it from the U.S. Federal Reserve or government spending. The overall money supply in this country has increased dramatically over the last 24 months, so we have a situation of too much money chasing too few goods – and land is one of those, along with building materials, both of which drive up replacement costs. It’s a problem that is further exacerbated by supply chain issues. We are an approximately $2.5 billion enterprise value company with significant liquidity to grow and the vast majority of our acquisition volume is driven by already constructed, leased buildings and the competition is as fierce as I have ever witnessed. Our competition is driven by the enormous amounts of liquidity in the market from both easy money policy and the “printing of money” that I previously mentioned, along with the limited stock of good quality real estate. I don’t see a slow down coming any time soon in general real estate asset pricing, as the flood of money and limited availability of assets may offset the rising rate environment that we are now just starting to experience.
How are rising interest rates impacting your line of business?
Essentially, our cost of capital, along with all other companies, will go up, whether it’s debt or equity capital. Thus far, we haven’t seen a widening of capitalization rates, but I do think that interest rate pressures may “weed out” fringe and secondary players in the market. Ultimately, if competition doesn’t abate, generally speaking, investors may have to settle for a lower return environment until market equilibrium is reached.
What have been your strategies to recruit and retain talent in the current labor market?
Sila Realty Trust has been a true market leader in anticipating the hybrid work schedule. Back in late 2020 during the height of the pandemic, it was management’s determination to restrict return to the office to ensure the health and well being of our employees. We noticed that our employees were highly productive using the latest technologies that we implemented despite working from home. Throughout the pandemic, we were constantly checking on our employees through anonymous surveys, and one key finding was that many of our employees desired to work part of their week from home. After much thought and conversation with our employees and amongst the company’s leadership team, we decided to reduce our office footprint from approximately 25,000 square feet to approximately 10,500 square feet in a new location at 1001 Water Street, the only Class A trophy office property in the Tampa Bay Region. 1001 Water Street is Well Certified and resides in the only Well Certified neighborhood in the world – criteria which we found highly appealing to both retain and attract the highest quality talent. I would also mention that we remained highly committed to our employees during the pandemic, ensuring full compensation and even increasing many of our benefits, and did not reduce our workforce due to the overall challenging economic environment. I think that we are absolutely seeing our commitment to our employees pay off as we have had very low turnover at our company the last few years, and, more recently, have seen an even more excited and committed staff to the mission of our company.
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