Why More Behavioral Health Operators Opt to Lease Instead of Own

Behavioral health providers largely opt to lease real estate instead of buying it in order to maximize capital going into operations. That’s where investors often say they can get the most return for their investment, and where providers say they can best address patient needs. 

This happens to such a degree that the behavioral health industry sees some established incumbents offload entire facility portfolios to real estate investment trusts (REITs). Meanwhile, fast-growing newcomers to the national marketplace categorically reject owning real estate in the first place.

This often goes as far as to leave commercial real estate development out of the organizational structure of the business.

“A lot of these behavioral health providers are kind of startups. They are new companies with private equity backing, and they are ready to go. All they need is a location,” Charles Watkins, vice president of development for Nashville, Tennessee-based health care real estate development firm Oman-Gibson Associates (OGA), told BHB. “A lot of times, these executive teams don’t really have any kind of real estate development experience, and they’re looking to outsource that.”

Before the pandemic, low capitalization and interest rates coupled with high demand for health care facilities made real estate plays viable for health care operators, Watkins said. But that’s no longer the case. 

“Most of the providers we work with are not interested in owning their real estate,” Watkins said.

The rise of telehealth in behavioral health, which allows patients and providers to skip real estate altogether, also raises questions about the value of owning behavioral health facilities. But it hasn’t been all smooth sailing for purely digital behavioral health companies. Many of these players have faced challenges in meeting the needs of behavioral health patients and face an uncertain regulatory future. These struggles have highlighted the importance of proximity and community to behavioral health.

By deprioritizing real estate ownership, behavioral health operators are often left to take whatever is part of a local commercial real estate market’s inventory, which still requires some degree of spending on real estate needs. 

“We have made a conscious decision that we are not going to own real estate. We think our capital is better spent in providing care,” Spero Health CEO and President Steve Priest told Behavioral Health Business. “We’ll be approaching 100 facilities here by the end of the year and that would be a lot of real estate for us to own.”

Founded in 2018, the outpatient addiction treatment provider operates 92 locations in six Ohio Valley states, according to its website. Spero Health is backed by the investment firms Heritage Group, Health Velocity Capital, South Central Inc. and Frist Cressey Ventures. 

We have made a conscious decision that we are not going to own real estate. We think our capital is better spent in providing care.

Spero Health CEO and President Steve Priest

Spero Health’s strategy has called for de novo growth of new centers. By leasing space, the company is able to open more locations faster. It is also able to do so at a better overall price by zeroing in on a very specific checklist of property features. Spero Health announced its first acquisition earlier this week.

The company looks for properties that are turn-key or require minimal investment to meet zoning requirements and have additional space to allow the clinic to grow. Additionally, the Spero team prioritizes existing medical zoning, being on public transportation routes and being in an area known for health care services, especially being close to a hospital. 

“We just want to put ourselves in a position where we’re able to do it as economically as possible on the front end,” Priest said. “It’s just the economics of it. It’s less work to get it ready to go and in many cases rapidly impacts speed.”

Focusing on locations that tie patients and Spero Health alike into a local health care economy is key to the whole of the company’s approach to care.

“I still believe at the end of the day that most healthcare is local,” Priest said. “And when folks are struggling with substance use disorder, that in-person care, that connection to the team, that human connection is critically important.”

Outpatient care requires a lighter commitment to real estate

Hybrid care delivery models that blend in-person and telehealth require special real estate consideration, Evan Lengerich, co-founder and CEO of Denver-based The Collective, told BHB.

“For us, our offices are consumer-centric and our offices are not ground-level retail,” Lengerich said. “They are in specialized Class A or Class B real estate, … next to those retail models of medicine like a dental practice or a dermatology practice where it’s easily accessible; parking is important. 

“The feel, the look, the general aesthetics of the office are less medical and more retail consumer.”

Founded in 2019, The Collective focuses on offering in-network outpatient mental health services. It operates five locations in Colorado and is working on an acquisition in New York City that Lengerich said could eventually lead The Collective to open as many as 15 locations in the New York tri-state area.

Like Spero Health, The Collective is focused on growing through de novo openings. Lengerich said the New York acquisition was a “serendipitous” way to expand into a strategic market with strong payer relationships. And like Spero, The Collective leases all of its provider space.

Getting patients into their offices is vital for getting biometrics and physical care for medication management. But beyond that, the office itself doesn’t need to enable much more than that, Lengerich said.

“Our offices are very well situated in places that were previously accounting offices or lawyers’ offices, where you’ve got the privacy of multiple offices,” Lengerich said, adding that what investment The Collective puts into real estate goes toward augmenting “the patient flow” of the space.

More intense care requires more interest real estate needs

Westlake Village, California-based eating disorder provider Alsana Inc. aims to provide patients with a home-like experience in their facilities. That can be a problem when considering local zoning requirements for commercial real estate.

The company offers intensive outpatient care (IOP), partial hospitalization programs (PHP) and residential treatment on top of outpatient services. The former two services can be offered in office-like settings while the latter services are just a step removed from an inpatient stay, said Ronda Cannon, regional director of development for Alsana.

“The biggest challenge that we have actually faced in the past is zoning,” Cannon said. “Because we’re not an inpatient or hospital setting, we want it to be a home-like environment but can’t necessarily [be in] a home because they’re zoned for residential use only.

“So we would need to go into something that is commercially zoned or maybe residential special use. … That’s very, very difficult to come by, very challenging to find.”

At its Birmingham, Alabama, location, Alsana set up in a building previously zoned as a nursing home. This allowed for a residential treatment center and the desired home-like feel. But because it is in a commercial area with other health care services, the location doesn’t necessarily afford a lot of privacy. 

“When you’re talking about behavioral health, the clients that go in and out really want and deserve anonymity,” Cannon said.

Alsana partnered with OGA on another facility that required extensive work.

In that case, Alsana acquired a three-level, nearly 10,000-square-foot office building and demolished most of the interior and created six beds rooms and other amenities on the top floor, offices and meeting spaces on the second floor and an industrial kitchen and other public space on the main floor, Cannon said.

Even though Alsana acquired the building, OGA helped facilitate a sale-leaseback of the facility with one of Alsana’s banking partners.

“The more acute the care, the more difficult it is for an adaptive reuse of a facility,” Watkins said. “Outpatient is a lot easier with zoning and an easier story to tell with a community.”

The story changes for more severe levels of care often leaving providers to get creative in the types of real estate that they seek when they want to grow. Watkins has seen behavioral health facilities go into office buildings, homes, former lodges and camps, farms and former YMCAs.

The creativity around commercial real estate in behavioral health often is an attempt to sidestep zoning fights which are a bane to all types of health care developments.

Stigma and zoning

Just as the stigma against behavioral health for patients seeking care has lessened over the years, stigma against behavioral health operators and facilities has somewhat lessened in Watkins’s estimation.

“There’s more of this idea that there are not bad people, these are sick people,” Watkins said. “But on the ground level, there’s still very much that ‘Yeah, that’s fine and dandy but not in my backyard.’

“I’ll even go one step further and say that even I’ve run across municipalities, mostly small towns, and other communities that are just in full-blown denial.”

Many local governments and other zoning entities have highlighted special uses of property codes following the onset of the pandemic and the light it has placed on mental health, Watkins said. He added that being transparent and proactive in communicating what a facility will do and the need it will meet with communities and local decision-makers.

A “secret weapon” that Watkins highlighted is looking at local bed and breakfasts for care that requires overnight stays.

Notable exceptions

There are notable exceptions worth mentioning when it comes to behavioral health providers owning their own real estate.

For instance, King of Prussia, Pennsylvania-based Universal Health Services Inc. (NYSE: UHS), one of the largest behavioral health operators in the U.S., owns about 86% of its behavioral health facilities, according to its 2021 annual financial disclosure.

Across its behavioral health and acute care businesses, UHS owns about 89% of its 406 locations.

The largest pure-play behavioral health operator — Franklin, Tennessee-based Acadia Healthcare Co. Inc. (Nasdaq: ACHC) — owns about 39% of its facilities, according to its most recent annual filing. 

Both UHS and Acadia Healthcare offer a wide range of behavioral services that include some of the highest levels of acuity settings.

But on the ground level, there’s still very much that ‘Yeah, that’s fine and dandy but not in my backyard.’

Charles Watkins, vice president of development for Oman-Gibson Associates

But on the outpatient side, real estate use gravitates more towards leasing spaces even at scale.

Scottsdale, Arizona-based LifeStance Health Group Inc. (Nasdaq: LFST) leases all of its centers, according to its annual financial filing. Its website lists 652 centers in 32 states.