On March 11, 2020, the World Health Organization (WHO) declared COVID-19 a global pandemic. Over the ensuing weeks, local, state, and national governments have enacted a variety of policies focused on reducing the spread of the disease and the short-term impact on the healthcare system.
The Federal Reserve lowered interest rates in early March and then injected ~$1.5 trillion in liquidity into the short-term funding market, followed by a 100-basis point rate cut and a commitment to $700 billion in quantitative easing measures. U.S. Congress passed a $8.3 billion emergency spending bill initially followed by the Families First Coronavirus Response Act on March 18. This was followed by the passage of the $2.2 trillion CARES Act [i] on March 27.
The public markets have been extremely volatile, and analysts have continually revised economic growth outlooks. For instance, on March 28, JPMorgan Chase & Co. refined its U.S. gross domestic product (GDP) forecast to -10% in the first quarter and -25% in the second quarter; this represented a revision from a previous projection of -4% in the first quarter and -14% in the second quarter. [ii]
Within the healthcare real estate markets, supply disruptions have delayed some projects, though some debt has, thus far, remained available. If a construction slowdown constrains inventory, there could be a benefit for some existing buildings in certain markets in that competitive supply may be diminished in the medium term. [iii] The long-term impact of the transition to more remote work is uncertain; some estimates suggest that, while less than 5% of the U.S. workforce works from home more than half the time, roughly 50% of U.S. jobs could be conducted remotely with some regularity. [iv] A long term shift to more remote work could put pressure on some area office markets, which could have an associated effect on medical office vacancy, as some buildings target both professional and medical tenants. Telemedicine usage has also grown exponentially, and analysts are debating what the lasting effects will be on the industry. [v]
As unemployment has risen and the impact of COVID-19 has spread across more sectors of the economy, an increasing number of commercial landlords have been forced to consider alternative arrangements in order to avoid vacancy, while tenants are also evaluating options. [vi] Tenants across commercial and residential property sectors have requested rent relief, [vii] and landlords are reviewing loan provisions and debt obligations. [viii]
While many considerations are lease-specific, general considerations for tenants and landlords [ix] that are being discussed in the marketplace include:
For healthcare real assets, some buildings are owned by REITs or third-party investors, while others are owned by a provider (physician group or hospital) and leased to another provider. Issues that healthcare landlords and tenants are grappling with are myriad. Providers are facing short-term liquidity challenges, along with most of the considerations that commercial landlords are facing (as noted above). [xviii] Furthermore, providers must also navigate compliance issues specific to the healthcare regulatory environment. Pertinent issues facing healthcare landlords and tenants include:
Rent restructuring, deferment, or abatement for tenants directly affected by COVID-19. For landlord/tenant relationships with Stark concerns, CMS has just released (March 30, 2020) a temporary blanket waiver which should be carefully considered if lease terms are being modified in the short term. [xix] Landlords and tenants may also negotiate a rent reduction, abatement, or deferment for another consideration of value, such as a loan, lease guarantee or lease extension.
Short-term leasing arrangements at facilities which have been repurposed for COVID-19 related factors. Hospitals are preparing for shortages of ICU beds [xx] and may execute short-term leases at specialty hospitals or skilled nursing facilities that have excess capacity. These arrangements may also be based at medical office buildings (MOBs) or ambulatory surgery centers (ASCs), where elective procedures have essentially ceased. [xxi] Short-term arrangements should be documented and evaluated for the total array of services that are being provided, which may include use of space, equipment, personnel, and purchased services. If necessary, a third-party firm with the requisite expertise should be consulted to assist the parties in executing these short-term leasing arrangements.
While the recently issued CMS blanket waiver provides parties subject to Stark increased short-term flexibility, the duration for which the waiver will apply is uncertain. Furthermore, the CMS blanket waivers are specific to “COVID-19 Purposes”, as defined in the waiver. VMG Health advises that hospitals and physician groups carefully document new arrangements and be prepared to modify these immediately if these arrangements are executed under the blanket waiver. Furthermore, the parties should consider the sustainability of any lease modifications for both tenant and landlord. If the original financial terms of the arrangement are adjusted, an FMV analysis may be required to document the arrangement going forward.
The duration of the COVID-19 pandemic remains uncertain, and the ultimate impact on the healthcare real estate market is similarly uncertain. As providers seek to navigate short- and long-term considerations related to their owned and leased real estate, they should keep abreast of the most recent regulatory guidance while also monitoring fundamental changes to the real estate markets which may affect valuations or warrant a change in their real estate strategy. For upcoming lease expirations and new negotiations in the coming year, providers should evaluate potential changes to FMV specific to their local market and to the property type in question.
[iii] Cushman & Wakefield Research – March 16, 2020 Coronavirus Update: Time to Reassess
[iv] “Latest Work-At-Home/Telecommuting/Mobile Work/Remote Work Statistics” from globalworkplaceanalytics.com