Healthcare commercial real estate has long been considered by many a relatively resilient investment space due to its essential nature and consistent demand. Within the healthcare sector, Inpatient Rehabilitation Facilities (IRFs) stand out as a niche but steadily growing area.1 The overall post-acute care market is projected to nearly double over the next 10 years, growing from $820 billion in 2022 to $1.6 trillion by 2032, with a compounded annual growth rate (CAGR) of 7.1%;2 IRFs play a significant role in this post-acute care ecosystem.
What Are Inpatient Rehabilitation Facilities?
Inpatient Rehabilitation Facilities provide specialized care for patients recovering from significant medical events, such as strokes, spinal cord injuries, brain injuries, or major surgeries. These facilities focus on helping patients regain independence through intensive rehabilitation programs, including physical therapy, occupational therapy, and speech therapy.
IRFs typically cater to patients who are discharged from acute care hospitals but still require intensive, focused recovery care. The goal is to help patients recover to the point where they can resume daily activities and maintain their quality of life. The average stay in an IRF is around two weeks, during which patients typically receive personalized care plans designed to optimize their recovery.3
Key Growth Drivers for IRFs
Several factors may help drive growth in the IRF sector, some of which include:
- Aging Population: The demographic shift toward an aging population is a major driver of demand for IRFs. The baby boomer generation, now in their 60s and 70s, represents a growing population in need of rehabilitation services. According to the National Library of Medicine, the mean age of admission for IRF patients is 70.4 As this demographic continues to grow, the demand for specialized rehabilitation services may likely increase as well.
- Underserved Markets: There is a significant gap in access to rehabilitation services in many secondary and tertiary markets. IRFs are often concentrated in major urban centers, leaving many smaller markets without adequate rehabilitation options.5 Operators targeting these underserved areas can fill this gap, meeting both community needs and financial objectives.
- Prevalence of Chronic Diseases: Chronic conditions such as diabetes, heart disease, and neurological disorders are on the rise,6 especially among older populations. These conditions can often lead to hospitalizations, followed by a need for rehabilitation services. IRFs are ideally positioned to meet this demand, as they offer specialized care that helps patients recover.
- Healthcare Policy and Regulations: In recent years, healthcare policies have placed an emphasis on improving patient outcomes and reducing hospital readmissions. Inpatient rehabilitation plays a crucial role in achieving these goals. Hospitals are increasingly referring patients to IRFs to ensure they receive the necessary rehabilitation, which helps reduce the likelihood of readmissions. A large percentage of IRF patients are covered by Medicare,7 helping provide a reliable source of revenue for these facilities.
There are several important factors that investors should keep in mind when evaluating opportunities in IRF real estate investment. Some of these factors include:
- Regulatory Environment: Healthcare is a heavily regulated industry, and changes in policy or reimbursement rates can have a direct impact on the financial performance of IRFs. Investors should stay informed about regulatory developments, especially those related to Medicare and Medicaid, as these programs are key revenue sources for many facilities.
- Operator Expertise: Business success in this sector can often hinge on the experience and capabilities of the facility operator. Identifying sponsors that partner with operators who have a strong track record in managing healthcare facilities, particularly IRFs, may be a crucial consideration. Effective management is critical to ensuring high-quality care for patients and maintaining a financially viable operation.
- Market Demand and Location: As with any real estate investment, location is critical for healthcare commercial real estate as well. Markets with a growing elderly population and limited access to existing rehabilitation services may offer favorable dynamics for the sector. Conducting thorough market research is essential to understanding the demand and viability for IRF services in a particular area.
IRFs represent a growing niche for potential investment opportunities within the broader healthcare real estate market. With the post-acute care sector predicted to nearly double in size by 2032, driven in part by an aging population and increasing prevalence of chronic diseases, IRFs may be well-positioned to help meet the healthcare needs of the future. For investors seeking a healthcare real estate exposure, IRFs may offer a compelling case. However, as with any investment, these investment opportunities require careful consideration of market demand, regulatory changes, inherent risks, and operator expertise.
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In addition to more general risks such as high vacancy rates, oversupply of product in the market, and credit quality of tenants, some of the factors that can impact the success or failure of hospital investments include, but are not limited to, rising or falling healthcare demand in the area and high turnover costs. Hospitals are highly specific buildings with waiting areas, exam rooms, and specialized healthcare characteristics. When a new tenant comes you may have to repurpose the space for their specific needs, potentially increasing Tenant Improvement (TI) costs.
