With the passage of the Affordable Health Care Act, 2012 was a watershed year for the health care industry. The law’s adoption re-emphasized the need for increased financial operating efficiency for health care systems. But Baylor Health Care System in Texas anticipated this need more than a decade ago, outsourcing its entire real estate portfolio of approximately 9.8 million square feet to CBRE. CBRE created a single department, consolidating all real estate-related functions and centralizing key work processes. Since 2001, the partnership has achieved aggregate savings of $58 million against construction budgets and reduced operating expenses by over $36 million. The firm also secured strategic properties for future system growth, while developing numerous quality-driven standard practices.
Other nonfinancial results have also been significant: Since 2001, CBRE and Baylor have completed 12 ground-up development projects, including three specialty hospitals; three hospital expansions; two green-field general hospitals; and four medical office buildings (MOBs). CBRE has also advised Baylor in the monetization of a 1 million-square-foot office building portfolio.
Before considering the broader outsourcing, Baylor worked with CBRE on important assignments over several years, including the delivery of a major heart hospital, where CBRE produced dramatic savings against the initial budget.
“In our firm, they consistently saw a level of real estate expertise and bench that did not exist within Baylor,” explains Kevin O’Neil, Executive Managing Director of CBRE Healthcare Services. “There was also a lot of trust that developed during these early assignments. Baylor had ambitious growth plans, which required effective, scalable real estate execution. They were not encumbered by the notion present at many hospitals that everything had to be created and handled by Baylor employees. They saw CBRE as being key facilitators to providing cost-efficient delivery and speed-to-market.”
Baylor grew through a series of acquisitions of community hospitals and physician practices. “In the early days of our relationship, CBRE was able to provide us with a new and comprehensive understanding of our portfolio,” said Wes Huff, Vice President of Real Estate Services, Baylor Health Care System. “They provided the energy and focus to centralize and standardize real estate operations and they provided an industry-savvy and professional interface with doctors and tenants on leases to ensure appropriate regulatory documentation.”
“All these things allowed us to focus on our core mission of delivering safe, compassionate and affordable health care and these things continue to be of great value. It’s a great platform, a great team – they work hard, they’re talented, and they are as committed to the Baylor Mission as any other employee who works for the System,” Huff added.
Today CBRE manages 253 assets, ranging from hospitals to office buildings to warehouse space, and is responsible for $456 million of annual operating and capital spending. CBRE’s menu of services includes facility management and engineering; leasing and property management of MOBs; transaction management; campus real estate planning; portfolio lease administration; project management and development; and strategic planning and consulting. As part of the outsourcing, Baylor’s engineers and other facilities staff became part of CBRE, where they enjoy enhanced opportunities for professional training and education and peer support as part of a global real estate services firm.
“We collaborate with Baylor to understand their short- and long-term business objectives, then bring the right resources to the table to solve for what is needed to support that business plan,” said Tim Couch, Senior Managing Director, CBRE Healthcare Services. “There are firms that can do bits and pieces of what we do, but no one in the marketplace has the breadth and depth to deliver all of these services in an integrated fashion.”
CBRE hosts a quarterly real estate meeting with executive leadership teams at each of Baylor’s hospital campuses. “The breadth of our platform allows us to adjust our priorities as client focus changes,” said O’Neil. “Initially, a lot of the emphasis was around driving operating savings. While that pressure remains, we’ve completed over $1 billion of projects, including new hospitals, divested most of their MOBs, created a Center of Excellence in facilities, developed a strategic planning capability, and implemented a comprehensive energy management program – the challenge is always new.”
CBRE’s comprehensive, integrated platform allows for those solutions to be driven by a single firm instead of a quilt work of companies, “most of whom would not understand the Baylor culture,” O’Neil explained. “Client continuity, heightened quality control, and improved clock-time are major benefits to Baylor. However, it is critical to understand that the key to our long-term success has been Baylor’s willingness to consistently partner and collaborate with us to define success for new initiatives upfront.”
Couch agreed. “We have a client-partner who is committed to adapting as the organization and industry change; and we can bring the right resources to bear, such as real estate talent, best practices from other clients and market intelligence,” he noted. “It’s a potent combination for staying in the vanguard of a very dynamic industry.”