Feature Story: Behavioral health takes center stage

Demand is strong for services and facilities, but roadblocks are holding up development, according to panel at InterFace Healthcare conference

By John B. Mugford

NASHVILLE, Tenn. – As the country has dealt with the COVID-19 pandemic in recent years, behavioral health has become a national concern as more and more people struggle with a variety of stress- and anxiety-related issues.

In 2021, the American Psychological Association reported that its “Stress in America” survey revealed that Americans have been profoundly affected by the pandemic, with 78 percent of adults surveyed saying that it has been a “significant source of stress” in their lives.

This mental health crisis, if you will, has put a much larger spotlight on the importance of providing behavioral healthcare services than at any time in recent memory.

As a result, healthcare real estate (HRE) professionals and firms have put more of a focus and emphasis on behavioral health facilities, both on the development and acquisition/ownership of such facilities.

“Behavioral health was a hot topic before COVID-19, but now, post-COVID, we’ve all experienced children being out of school during that time … and we’re seeing that kids have lost social skills, they’ve lost interaction and they have more anxiety and more depression and self-harm, and all sorts of behavioral health issues,” said Jennifer “Jen” Murphy, director of development with Tustin, Calif.-based Newport Healthcare, whose Newport Institute and Newport Academy facilities provide mental health services for children and young adults at locations throughout the country.

“We’re trying to get them back to some normalcy through our program,” Ms. Murphy added. “And how that relates back to the real estate industry is that we just need more facilities. There just aren’t enough, and that means there just isn’t enough good quality care for teens and young adults all the way up to age 29.”

She was part of a recent panel discussion at the 11th annual InterFace Southeast Healthcare Real Estate Conference in mid-November in Nashville. The discussion was focused on the behavioral healthcare industry and the real estate facilities supporting it.

The session was titled, “Everything You Need to Know About the Burgeoning Behavioral Health Market,” and it was moderated by Chris Barnet, executive VP with Rubicon Representation LLC, a commercial real estate firm based in Dallas.

In addition to Ms. Murphy, the panelists comprised professionals with three well-known HRE development firms:
■ Nathan Golik, executive VP of real estate development with Denver-based NexCore Group LLC;
■ Kyle Miller, managing director of development with Dallas-based Caddis Partners; and
■ Darrell Simpson, senior VP of development with Birmingham, Ala.-based The Sanders Trust (TST).

All three of the HRE development executives said their firms have entered and continue to develop and look for opportunities to develop and own behavioral health facilities, including behavioral health hospitals and outpatient buildings.

They also added that while there is currently very strong demand for such facilities, there are plenty of headwinds and difficulties in doing so.

“Every new project that we’re working on right now, be it a speculative medical office building or a build-to-suit, including behavioral health facilities, we’re getting a lot of inquiries from behavioral health groups” about leasing space in them, said Mr. Miller of Caddis. “The demand is there, it’s just that it’s not that easy to get that supply out there and get those projects started and completed.”

He added that development, and not just for deals involving behavioral health facilities, is “a challenging environment to be in right now, while some deals are working – and we certainly have committed to deals that work financially – but the rising costs and interest rates are slowing down deals. You think you might have it all figured out and know what the interest rate will be, but then construction costs will rise, or there are other issues to deal with, and it makes it very difficult to balance it all.

“Construction costs are really a roadblock right now,” Mr. Miller continued, “as we haven’t seen those retreat at all, which is usually the case when you see interest rates rise. But that hasn’t happened this time, even though it might play out at some point in time.”

Ms. Murphy also noted that the behavioral health industry continues to face challenges from people and groups, “NIMBY’s, or not-in-my-backyarders,”  who do not necessarily want such facilities in their communities.

Attitudes are changing, in some places

Even though such roadblocks and stigmas exist in many communities, Mr. Golik of NexCore said he believes that “people’s perspectives are starting to change. We did a site search for a behavioral group and reached out to several municipalities in the Dallas area and, while there were indeed some firm ‘no’s,’ as in we’re not going to rezone that site, there were also a number of economic development directors and city managers that we spoke to who said, ‘absolutely, we see what’s going with young people and we recognize the opportunity to help them and we want that type of investment in our city.”

He added that attitudes are most likely changing because so many people throughout the country are affected by behavioral health issues, “it’s no longer just not a unanimous, across the board, “we’re not interested.”

Ms. Murphy and the other panelists agreed.

The panelists noted that before embarking on a new development project, part of the due diligence process should entail finding out what cities are open to such development projects.

“You really need the support from local officials and the community if you’re going to execute that strategy,” Mr. Golik said.

Mr. Miller of Caddis added that “for a developer, you have to figure out a way to tie up the land for a long period of time while you go through that licensing process, because it is typically quite a long process. It’s an educational process that you have to go through on every development in this space, and you have to understand that and know that going in.

“Because if you go in without trying to educate people along the way, that creates a real roadblock. Those roadblocks are being lifted a bit, and the fact that we’re seeing an increase in reimbursements for behavioral health services, now there is more investment being made into this industry and sector.”

He added that many of the “behavioral health operators that we’re working with are now private equity backed. And that is really rolling up some of the mom and pop operators of the past.”

Ms. Murphy added that another incentive for developing and operating behavioral health facilities is that many of them are “covered under the Americans with Disabilities Act (ADA), which provides a number of incentives (such as tax breaks and financial assistance). People forget this, and this is something that cannot be taken away.”

Roadblocks still exist

Mr. Barnet, the moderator, added that “in this business you’ve got a lot of zoning roadblocks, and you’ve still got the stigmas attached to behavioral health. So, it really is an educational process to get projects moving forward. Many outsiders think of it as just drug and alcohol rehab, but today there are so many mental health issues that people are suffering from, such as depression, anxiety, food disorders and others as well.”

Ms. Murphy said that when she started with Newport in 2015, “our number one reason for kids checking in was substance abuse. But it has completely flipped. And the reason for that is because they come to us for any number of reasons, be it depression or anxiety, or let’s take, as an example, self-harm treatment. Well, many of these kids are utilizing substances, but you have to get to the root cause.

“Once you can heal them and successfully treat the real reason someone is there, and heal the family as well, the substance abuse, if there was some, typically goes away.”

Staffing shortages harm the industry

Ms. Murphy noted that even though demand is strong for behavioral health services and facilities nationwide, and that developers are willing to build projects that make financial sense, a major issue holding back the building of new projects is a severe shortage of behavioral health professionals.

“We’ve noticed that in the medical field, especially with RNs (registered nurses), they have so many options right now to work remotely, which means they don’t necessarily want to come back out in the field,” she said. “If they don’t want to work in the hospitals anymore, if they don’t want to be in the residential communities, and they just want to be able to do their charting and have a remote-working career, they can find many opportunities to do that. That’s great for them but tough on us because in our industry we need medical professionals on site.”

Facilities that are not fully staffed, she noted, cannot be fully occupied by patients, either, Ms. Murphy said.

“It’s hard to continue to develop new properties when you have some really large facilities that are not fully staffed, and as a result do not have all of their beds filled because of a lack of staff,” she noted.

“The bottom line is that the only way that behavioral healthcare providers and companies can make money and keep providing these very necessary services is to fill the current facilities and keep developing new ones. The demand is there (from a patient standpoint), but what can you with facilities in which maybe there are 60 beds but they’re (not all full).”
Most developers of behavioral health facilities, according to Mr. Miller, would rather be involved in a project in larger, urban areas than in a remote, rural area. “Because from an exit strategy standpoint, you might have that facility a lot longer than you want it.”

Mr. Golik added that developers take bigger risks when developing single-purpose facilities, which can be the case with behavioral health hospitals or outpatient facilities.

“If a project doesn’t really have an alternative use, you’ve got a capital issue and a strategy issue that you have to solve. You have to figure out the long-term plan for the facility and if can be converted to something else. Or is that all it can be? And if that’s the case, what is the credit of the user, what’s your long-term strategy, what’s your operational history?”

Health system involvement helps

As the panelists discussed how important it is to find a financially strong behavioral health operator to build facilities for, they noted that more and more health systems are getting involved in providing such services. Many systems, they noted, are starting to partner with behavioral health operators to provide services in their markets.

“We like this (ne trend) a lot,” Mr. Simpson of TST said. “We like our operators to have ties to the community, because a lot of our operators have national platforms, and provide services across the country, and if they have a JV partnership with a strong, local health system in a market, we look at that as a bonus.”

Mr. Barnet added that having a health system involved “really helps the underwriting, too.”

Mr. Golik noted that many health systems are looking for ways to improve the mental health services they offer, either by themselves or in a partnership with a provider that specializes in the industry.

“Most of them say they will do everything they can to help out with a project, what solution can they help provide?” he said. “Because I would say that 100 percent across the board, health systems say they could improve upon their behavioral health services, and that they need to do it better or not do it at all. But they also say that they need to deal with behavioral health in some way, because it’s becoming a problem in their emergency rooms, as well as collectively, for the system.”

For those reasons, Mr. Golik and the other panelists said they believe there will be more and more partnerships between behavioral health providers and traditional health systems.

When the panelists noted that many hospitals that have excess, typically older, space, often ask about converting that space to behavioral health.

Mr. Golik said that converting such space often does not work well, as “the problem there is that you’re trying to take older beds and trying to do something with them that doesn’t fit.”

Caddis has looked at possible conversions of “older hospital space to behavioral health,” Mr. Miller said, “but considering everything that you’d have to go through to make that happen, you’re better off doing a ground up project.”

Ms. Murphy agreed, noting that for a behavioral health facility to be successful and to help “save lives, which is really what we’re all about,” facilities cannot look institutional at all. We have homes in Virginia that are 12,000 to 18,000 square feet and have eight clients in them. We have smaller homes in California with six clients in them.

“These are beautiful spaces and we want them to feel warm and inviting – that is where you get the most healing, and that is factual.”

Not only are the most successful behavioral health facilities those that have a feeling of “residential warmth and comfort, but that have the flexibility of being able to treat pediatric to geriatric patients,” Mr., Simpson of TST said. “And they need to be able to maintain security.”

Mr. Barnet added, “and if you needed to repurpose a facility, having it be more aesthetic is a key. If it’s too institutional, you’re stuck with it and it’s very limiting.” 