Value Per Square Foot: A New Way of Thinking About Healthcare Delivery and Real Estate
As healthcare delivery and real estate become increasingly intertwined, it’s time to shift our thinking from cost per square foot to value per square foot. In today’s market, it’s no longer enough to simply measure the cost of a building or facility; instead, we must begin to consider how it can bring value to the overall operations, the community, patients, and healthcare providers. In this blog post, we will explore the concept of value per square foot and how it can help inform decisions around healthcare delivery and real estate.
The current system is broken
For too long, healthcare delivery and commercial real estate have been evaluated based on cost per square foot. This antiquated system of thinking has led to massive inefficiencies, with hospitals and other healthcare facilities paying too much for inadequate space that doesn’t meet their needs. This outdated system also fails to consider the value of the space, such as whether it will enable better patient care or support the latest medical technologies. Unfortunately, these considerations are often pushed aside in favor of getting the most space for the least amount of money.
This can also manifest when providers are deciding whether to remain at their current facility or build/move to a new facility. The cost per square foot of a new facility will almost always be higher than an existing and dated facility. However, the opportunity costs of NOT moving (space inefficiencies, lower volume, decreased patient and employee satisfaction, higher operating costs, etc.) should be factored in when making an informed decision.
As a result of the current way of thinking, healthcare providers have ended up with spaces that are costly to operate and don’t allow for optimal patient care.
It’s time for healthcare providers and commercial real estate experts to start thinking differently about how they evaluate projects. Rather than focusing on cost per square foot, stakeholders may be better served to shift their thinking to focus on value per square foot.
What is the value per square foot? Value per square foot is a concept that takes a more holistic approach to measure the profitability and value of a facility. Rather than focusing solely on the cost per square foot, the value per square foot takes into account other factors such as operating costs, revenue generation, operational efficiencies, employee and patient satisfaction, brand recognition, and clinical outcomes, among others.
How can we shift our thinking?
In order to shift away from a cost-per-square-foot mentality when it comes to healthcare delivery and commercial real estate, we need to be willing to think differently about the value that each space brings. This often involves stepping back and taking a more complete view of the available options and how they would impact the overall business. This process may include asking questions such as:
- If we choose Facility A, how will this impact our overall patient volume in comparison to Facility B?
- How does the location of Facility A compare to Facility B in terms of patient drive times, employee drive times, and overall visibility for new potential patients?
- How will this location impact the morale of our employees and the satisfaction of our patients?
- How do the operating costs compare between Facility A and Facility B and will there be any savings for being in a newer and more efficient space?
- Which facility will help to attract and retain the best talent for our practice?
- Are we focusing on potential savings today that will end up costing us more in the long run by not addressing our facility needs now? Typically, the cost of land, construction materials, labor, etc. only increases over time.
- How do environmental factors like natural light, air quality, and noise levels contribute to a space’s overall value and the longevity of our practice?
- Are there any savings that we can realize by moving into a custom space that is designed to fit the operations of our practice?
- Are our competitors gaining market share by taking a more proactive approach to their facility needs?
By taking a holistic approach and considering the long-term implications of a space, we can begin to transition from cost-per-square-foot thinking to one focused on maximizing value per square foot.
The benefits of thinking about value per square foot
Shifting our thinking from cost per square foot to value per square foot provides a number of benefits for both developers and healthcare providers alike. Not only does it allow for more efficient use of space and higher returns, but it also helps create projects that are built to last and are resilient against economic fluctuations. In the end, this type of thinking is essential for creating properties that will stand the test of time and remain attractive investments for years to come.
Reduced Labor and Other Operating Costs: Optimal Outcomes recently advised a physician group that leased space on multiple floors in a two-story medical office building along with another small office nearby. The leases were set to expire in two years and the practice was determining whether they would renew at their current spaces or plan to build a new facility for their practice. The new facility would have a higher rent; however, it was determined that the new facility would allow the practice to dramatically increase the efficiency of their practice and realize a cost savings on operations including reduced labor costs, removal of wasted space, more efficient procedure rooms using the latest technology, etc. The analysis below demonstrates the savings realized by a reduction of just three full-time employees and how that translates to the cost per square foot rent of a 25,000 SF facility. In this example, reducing the FTE count by 3 employees would translate to a $6.00 PSF savings on the lease rate and over $2 million in implied capital carry.
|Cost Savings from FTE Reduction/Efficiency|
|Premises Square Footage||25,000|
|Employee Cost (loaded)||$50,000|
|FTE Reduction in Personnel||3.00|
|Aggregate Cost Savings||$150,000|
|Implied Rental Rate Impact/Reduction||$6.00|
|Implied Capital Carry||$2,114,092|
Better Market Presence and Competitive Statement: A client of Optimal Outcomes was considering a new facility to replace their older and dated facility. The costs of the new facility would inevitably be higher than their current facility. However, in discussions with the practice, it was revealed that they were struggling to attract and retain patients and employees. The practice was in the middle of trying to recruit multiple doctors but were losing these recruits to another competitor in town. Upon further review, it was determined that the current facility was not offering the aesthetic or location attributes that patients and potential employees were desiring. Optimal worked with the practice to secure a land parcel in a more desirable location and design a building that reflected the quality of care that the practice offered. After less than a year in the new location, the results were starting to show and the increased costs of the new facility were offset by the additional revenue from new patients and the decreased costs of attracting new talent to the practice.
Additional Operating Room: Optimal recently worked with a physician group that owned a successful Ambulatory Surgery Center. The practice felt that they were missing out on revenue due to the constraints of only having two operating rooms at their current location. Optimal provided a proposal for a new facility as well as a plan for a potential expansion and renovation of their current facility. Although the upfront capital for the project was significant, the practice ultimately decided that the opportunity cost of the missed revenue far outweighed the cost of adding an additional operating room. The practice elected to expand and renovate its current facility and through strategic planning and thoughtful design, the current operations were largely uninterrupted during the project and the third operating room has been a success.