As Behavioral Health Care Demand Rises, the Need for Real Estate is Only Growing

The business of behavioral health continues to boom, as M&A activity is on track to break records yet again in 2021. The dealmaking has also sparked real estate interest into the space, with Colliers International (Nasdaq: CIGI) among the various companies providing brokering and leasing services to operators buying existing properties or opening de novos.

Shane Harmon is a senior vice president of commercial real estate brokerage for Colliers, a Toronto-based real estate services and investment firm that manages $45 billion in assets.

Based out of San Diego, Harmon heads up Colliers’ behavioral health real estate activity within the firm’s health care services division, working with operators across the country to re-purpose inpatient and residential care facilities.


WIth nearly 30 years of commercial real estate experience under his belt, Harmon to date has worked on behavioral health care deals totaling approximately $200 million. Those deals consist of property sales and lease transactions for facilities spanning 12 states, representing over 2,600 beds for services like substance use disorder (SUD) treatment, inpatient psychiatric hospitalization.

One prime example of Harmon’s work was a deal he recently brokered for We Level Up (WLU), a Deerfield Beach, Florida-based SUD treatment provider that agreed to lease a Riverside County, California property for its newest residential center. The property is a 1.25 acre, 12,000-square-foot facility consisting of seven buildings and holding 36 beds. The deal is also significant in that it marks WLU’s entry into California, part of the provider’s overall plans for multi-state expansion.

Harmon recently spent some time with Behavioral Health Business, where he discussed Colliers’ work on behalf of behavioral health providers, how the pandemic has impacted the behavioral health real estate market and more. You can find the conversation below, edited for length and clarity.


BHB: Let’s start by talking about what you have been observing in the behavioral health real estate market since the onset of the pandemic.

Harmon: When COVID [started], I was slowing down for about six months. But after that, I didn’t really see much slowdown. I was concerned that we were going to have some companies that were going to default, especially for residential or inpatient care, because they weren’t going to be able to keep the census that they wanted.

I found that as opportunists were coming out of this and wanting me to find people that were faltering, it was hard to find any. After that six months, the demand even probably increased a little bit because of all the [attention] of what’s going on with everyone’s mental health.

There has been an increased demand for behavioral health and SUD treatment services nationwide. Has this uptick had any demonstrable effects on the business of Colliers’ health care group?

In general, there are more substance abuse treatment transactions that are happening within real estate than there were five years ago [and] maybe even 10 years ago. I would say within the commercial real estate [world], that understanding of what behavioral health or substance abuse treatment is more widely known, although it would still be considered a very specialty health care class.

The situation with [addiction] is completely out of hand. With regards to COVID …, what this has brought about — which doesn’t necessarily have a huge effect on the growth of my business plan — is telemedicine. I think telemedicine is here to stay in all aspects of health care, especially behavioral health.

With your clients right now, are they talking about how telemedicine might be impacting their behavioral real estate decisions going forward?

Because operators are getting more sophisticated, the mom and pops are getting bought out more and more, and because you have sophisticated money behind this, for the most part they’re all looking to see how they can increase their footprint. Telemedicine being a good part of that is fine.

Do you think that we’ll start to see more behavioral health REITs or institutional real estate investment vehicles enter the marketplace?

I think so. It probably took 10 years longer than it should have for senior housing to become like a major healthcare [trend]. It depends on what kind of returns those investors are going to get.

These speculative, non-institutional real estate investors with any product type are the ones that come first [to invest]. They say, “Yeah, this is worth experimenting on, because my single tenant return is pretty good.” Everyone’s got to be comfortable with the exit strategy, because you’ve got to be able to convince somebody that if this behavioral operator leaves, and this is the highest and best use that your occupancy cost is on this property, that you are going to be able to backfill it with another behavioral operator. That’s the challenge, but it’s also the opportunity.

Does there need to be more larger scale, behavioral health operators to attract institutional capital into the space?

We’re in this stage right now where the health insurance industry has been forced to embrace behavioral health as something that needs to be insured, and has to be insured federally.

Behavioral health has historically been [an industry of] a lot of smaller companies, more like you would find with senior housing 30 years ago. As senior housing has evolved and the products have gotten more sophisticated, and you’ve started to get more institutional capital behind operators and real estate, then you’ve seen what consolidation we’ve had in that market over the last 10-plus years.

You’re getting to the point where mergers and acquisitions with behavioral health operators are a pretty big part of the health care M&A segment today as a percentage, compared to where it was years ago. I think you’re going to start to see some of that scaling with larger operators … to a point where, you know, you’re going to have 20 to 30 operators that are going to be controlling a lot of the market.

Do you see the joint ventures as an opportunity for providers to expand the real estate footprints in the current market?

Definitely, [especially] with any kind of continuum of care that they can control, since [in behavioral health] the patient’s not going to be with them for a month, the patient could be with them for a couple of years. If they have the ability to control any of that, then they’re going to do it, because the harder part of scaling up is making sure you have the right personnel and the right clinical criteria. It’s taking advantage of the infrastructure you built early on.

Do you think the behavioral health real estate market is a non-cyclical one, where demand for care services will remain constant, with plenty of opportunities for firms to engage in brokering and leasing deals with providers?

I would not say it’s cyclical at all. Unfortunately, because of SUD, it is in growth mode on all aspects of behavioral health, whether it’s telemedicine or a psychiatric hospital. It’s all growing.

Down the line, if the behavioral health real market reaches a point where it becomes saturated, what might be some of the identifying signs to look for?

This market will probably continue to increase, just because of the [number of] untreated people. Taking that same philosophy and applying a similar real estate model [like] senior housing, it’s easy to look at the age demographics and understand how much more home health or assisted living facilities you might be able to project in the future.

You can’t necessarily do that as quantitatively with behavioral health. But if you go by the statistics that have so many people still being untreated, it’s not like those people are never going to need treatment in the future. It’s just building up.

If we figured out that more and more people are getting treatment, then you probably start to have more of a conversation about where the saturation of the market is. But until then, just on a macro level, people see that the treatment is continuously going to need to be there, and it’s going to need to grow to service the population.

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