Impacts of Artificial Intelligence on Healthcare Real Estate

Healthcare real estate stands as a uniquely specialized asset class, offering investors, owners and operators the potential for significant returns, a sticky tenant base and growing demand drivers.

Alongside its advantages, healthcare real estate also presents intrinsic challenges not typically encountered in traditional asset classes. These include escalating labor costs, substantial upfront capital requirements and heightened maintenance costs. In response, stakeholders are actively seeking innovative strategies to enhance revenues and reduce expenses.

Embracing artificial intelligence

Fueled by a motivation to optimize financial performance, owners, operators and investors are beginning to incorporate artificial intelligence (AI) platforms into their fundamental operations and frameworks. AI-driven solutions are enabling stakeholders to navigate the complexities of healthcare real estate with greater efficiency and insight through refined location analysis, improved site selection processes, precise budgeting methodologies and more accurate financial forecasting and analysis tools.

AI is the simulation of human intelligence in machines that are programmed to use learning to perform tasks that require the ability to learn from experience, solve problems, recognize patterns, interpret nuances of natural language and independently make decisions. As AI proves to have many real estate applications, we’re focused on how this tool may enhance the experience of owners and operators of healthcare real estate.

Key areas of impact for AI in healthcare real estate

At Fifth Third, we specialize in the healthcare real estate industry. Through our vast scope of expertise, we’re working with healthcare providers and investors and owners of a variety of healthcare real estate property types, including inpatient rehabilitation facilities, medical outpatient buildings, general acute care hospitals, behavioral health facilities, long-term acute care hospitals and even uncommon assets, such as blood plasma centers.

We’ve leveraged our experience facilitating transactions between owners, operators, investors, lenders and health systems to identify several key areas that AI will impact in the healthcare real estate landscape:

Site tours and tenant build-out budgeting

Advanced augmented reality tours that leverage AI software allow potential tenants of healthcare facilities to virtually explore buildings and plan and price future improvements—streamlining the leasing process and saving time and resources for operators and owners.

Healthcare real estate operators are typically deemed as sticky tenants because they invest substantial capital in the buildings they occupy. This capital is primarily allocated for extensive tenant build outs necessary to accommodate expensive medical equipment that is vital to the services they provide. The reliance on unique build outs for effective patient treatment underscores the necessity for healthcare providers to ensure a building is capable of housing all the equipment required for seamless operations. It is imperative for operators to accurately budget the amount of capital required to enhance space and install essential medical infrastructure.

With AI-based platforms, owners are now incorporating augmented reality tour options, such as Matterport, enabling potential tenants to take virtual 3D tours of buildings and assess a space’s suitability for operations. Additionally, ongoing research and development in augmented reality tour options seeks to collaborate with architects and contractors to incorporate technology that allows tenants to not only tour a space but also view renderings of future buildouts, while receiving estimates of the development costs that will be incurred during renovations. This not only improves an operator’s ability to budget for build outs in their proformas but also expedites the lease-up process, saving both operators and owners valuable time and resources.

Sustainability initiatives and operating cost savings

Triple-net lease structures encourage tenants to carefully manage operating expenses and reduce energy waste in facilities. Thanks to several data-driven AI platforms, operators can limit operating expenses and optimize the use of HVAC systems—saving these stakeholders money, while ensuring a more sustainable facility.

When leasing up a healthcare facility, owners and operators typically enter into triple-net lease agreements. This leaves the tenant responsible for 100% of operating expenses incurred each month. Bearing the responsibility of all operating costs, operators become more aware of strategies to reduce costs and lower their monthly reimbursements. AI technology offers an advanced, data-centered approach to address these concerns.

Innovative AI software solutions, such as Verdigris and PointGrab, leverage data integration alongside occupancy patterns and predictive analysis of HVAC usage trends. Utilizing these trends and patterns allows for the automatic adjustment of HVAC systems, based on factors such as usage frequency and weather forecasts. This effectively curbs energy waste and contributes to substantial cost savings. Energy-efficient, sustainable buildings also typically bear reduced risk factors and a longer useful life, resulting in an increased property valuation.

Location analysis and facility placement

Healthcare providers and owners of medical assets benefit significantly from AI’s population and demographic trend analysis tools. Analyzing age, payor mix and socio-economic trends, AI is assisting owners and operators in pinpointing the optimal location for a healthcare facility.

Health systems and operators are increasingly relying on predictive analysis and generative AI to refine location decisions for expanding patient services and care facilities. AI’s unique ability to analyze population, demographic and socio-economic data enhances trend prediction, allowing operators to precisely pinpoint the optimal location for a healthcare facility.

At the core of this analysis is the examination of the payor mix within a provider’s primary service area. This is a critical factor influencing the forecasted operations and financial performance of healthcare facilities. Insight into the payor mix of a location affords providers and owners the ability to better predict reimbursement trends and accurately forecast net patient revenues, resulting in improved returns and accurate budgeting. Generative AI can also analyze thousands of data points to accurately predict pricing fluctuations in the healthcare real estate market and identify areas with a growing demand for services based off age trends, income profiles and other metrics. Leveraging this invaluable information empowers owners and healthcare providers to make well-timed decisions on dispositions and acquisitions, while ensuring strategic facility placement.

Credit analysis

Tenant creditworthiness is crucial for assessing credit risk when owning a healthcare facility. To overcome the challenges of costly and time-consuming shadow rating processes, property owners can leverage AI-based credit risk tools—enabling quicker, more accurate assessment and improving investment decision-making.

A crucial factor influencing valuation and investment analysis in both healthcare and general real estate is the creditworthiness of the tenants within a building. Evaluating a tenant’s creditworthiness often involves utilizing rating agencies, such as Moody’s, S&P and Fitch, to obtain their credit ratings.

While many for-profit and not-for-profit health systems have readily available credit ratings, the process of obtaining one for the potential tenants who do not is typically expensive and time consuming. This leaves a significant portion of tenants unrated by these agencies. To bridge this gap, property owners and investors resort to constructing shadow credit ratings using comparable firms and analyzing various financial metrics—such as debt, leverage and profitability ratios. Despite being a common practice, the creation of a shadow credit rating can be laborious and prone to inaccuracies, prompting a search for more efficient and accurate solutions.

With AI-based platforms, the process of performing a shadow credit rating has become significantly more streamlined. Numerous AI applications can swiftly analyze financial statements, payment track records, transaction history and even non-financial data, creating a shadow credit rating in a fraction of the time required manually. These AI systems excel at identifying potential issues, such as deteriorating key performance metrics, financial ratios, delayed regulatory filings, employee payments and declining working capital positions.

Investors stand to gain substantial time savings and reduce the risk of human error when leveraging AI-based platforms to assess a tenant’s credit risk. This not only expedites decision-making processes but also enhances precision in evaluating and monitoring credit risk, providing a more robust foundation for strategic investment decisions.

Property management

AI chat bots are transforming healthcare real estate management by facilitating communication between owners and operators, streamlining maintenance reporting and enhancing tenant satisfaction—all leading to improved operational efficiency.

AI chat bots are poised to revolutionize property management within the healthcare real estate sector by facilitating seamless communication between owners and operators. Operators will enjoy the convenience of reporting maintenance issues and scheduling repairs through intuitive chat interfaces, streamlining the resolution process. Current and prospective tenants can leverage these chatbots to obtain instant and detailed answers to property-level inquiries, enhancing their overall experience. Property owners can enjoy a hands-off approach to management, as these automated systems efficiently handle routine tasks and enable owners to focus on strategic decision-making and investment growth. This technological integration not only improves operational efficiency but also enhances tenant satisfaction, contributing to a more streamlined and responsive healthcare real estate ecosystem.

Asset and portfolio management

The integration of AI applications in the asset management of healthcare facilities enables owners to access detailed property-level insights and navigate market trends effectively. This enhances decision-making processes, improves budgeting accuracy and optimizes capital allocation for a more profitable portfolio management approach.

Healthcare real estate owners stand to gain substantial advantages from integrating AI applications into their portfolio management strategies. By harnessing AI capabilities, owners can delve into property-level data with extreme precision, gaining insights that contribute to a comprehensive understanding of their entire portfolio.

The predictive analysis enabled by AI empowers owners to navigate key market trends adeptly, facilitating the creation of sell/hold analysis and lease-up projections. AI-driven tools can also enhance the accuracy of budgeting and forecasting, enabling owners to optimize capital allocation with confidence. In essence, incorporating AI into healthcare real estate management elevates decision-making processes, helping to ensure a more informed, strategic and profitable approach to portfolio management.

Administrative tasks

Several AI platforms are changing the way healthcare providers and traditional companies handle administrative tasks. From note-taking to analyzing patient records, monotonous administrative tasks are being streamlined by AI-based platforms.

In contemporary business landscapes, AI serves as a pivotal force, finding practical applications in diverse sectors. One of the most prevalent applications of AI today is the ability to expedite tedious and time-consuming administrative tasks, which is a challenge also shared by healthcare and real estate professionals.

Numerous AI-based platforms have emerged to alleviate the burdens of routine administrative duties, such as note-taking, document abstraction, meeting scheduling, and email and file organization. Microsoft Co-Pilot, a recently launched AI platform, stands out as a transformative tool that seamlessly integrates across all Microsoft applications. The software will automatically take meeting notes and highlight key discussion points, while also encompassing the ability to clear crowded inboxes and create graphs and data visualizations.

In the real estate domain, AI applications play a crucial role in facilitating the due diligence process. These systems adeptly scan complex legal documents, including leases, developer agreements and purchase and sale agreements, to extract vital information and highlight key terms and clauses.

In the healthcare sector, AI significantly contributes to improving patient-provider communication through therapy chatbots and online portals. The analysis of physician notes and electronic health records by AI leads to quicker and more accurate diagnoses. Additionally, telemedicine applications leverage the software to offer wearable remote patient monitoring systems that track vital signs, detect developing medical issues and promptly alert physicians in the case of an emergency. The multifaceted applications of AI underscore its adaptability, with tailored solutions enhancing efficiency in a complex healthcare landscape.

Drawbacks and limitations

While AI presents endless opportunities for improved healthcare and financial functions, it is important to be aware of its limitations and drawbacks.

The initial cost of installing AI systems is often high, posing a barrier for many organizations. Additionally, the environmental impact of AI cannot be overlooked, as these complex models utilize machine learning algorithms to perform tasks, recognize patterns and analyze data. To ensure the accuracy and efficiency of the learning algorithms, they must be trained using a tremendous number of datasets and calculations that demand substantial energy consumption and contribute to a large carbon footprint. A 2019 study revealed that a single AI model can generate more than 626,000 pounds of CO₂ emissions—equivalent to over 300 round-trip flights from New York to San Francisco.¹

Beyond environmental concerns, there’s also a societal impact to consider. AI has the potential to foster laziness among individuals who may increasingly rely on automated processes. Also, while AI can perform tasks efficiently, it lacks the depth of human emotion and common sense. It’s crucial for humans to infuse their personal touch, ensuring a nuanced and empathic approach to financial analysis and content creation. Despite its advancements, it is essential to recognize that relationships founded on human connection and understanding remain invaluable and transcend the capabilities of AI.

Why choose Fifth Third?

At Fifth Third, we have a deep understanding of the significance and role of AI in the healthcare real estate industry. We recognize the transformative role of AI technology but also know it is imperative to view these platforms as invaluable workflow enhancers, rather than mere replacements or shortcuts in work processes.

Our mission revolves around identifying key trends and understanding how AI impacts this sector. This enables us to enhance client outcomes, streamline processes and facilitate profitable transactions for owners, operators, investors and health systems. As a forward-thinking group, we not only recognize where the industry is headed but also actively lean into the future to meet the evolving needs of this rapidly changing landscape.

Partnering with Fifth Third for real estate transactional and investment banking services ensures that you’re aligning with a team that anticipates future trends and is committed to driving long-term success in this dynamic industry.

Real Estate Investment Banking Group

For more than 25 years, the real estate investment banking professionals at Fifth Third Corporate & Investment Banking have successfully served as advisors on real estate transactions in excess of $17 billion nationwide.

For additional information, contact PJ Camp, Managing Director, Real Estate Investment Banking, at [email protected] or Matthew Tarpley, Managing Director, Healthcare Real Estate Investment Banking, at [email protected]