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McDonald’s may be best known for Big Macs and fries, but the company has been described as the biggest real estate company in the world. McDonald’s real estate portfolio is worth $34 billion, and in 2018, rent from franchised restaurants totaled $7.08 billion.
For McDonald’s, real estate is a strategic asset. For decades, the company has been highly focused on finding corner locations that best serve its business model of convenience and drive-through service: locations that allow signage on two major streets and that have traffic signals to manage flow in and out of the location.
The COVID pandemic has demonstrated the value of McDonald’s real estate strategy. The company’s results for the second quarter of 2020 show that markets with a higher percentage of drive-through locations are showing faster recovery in volumes and sales. This revenue has offset significant revenue declines from the closure of in-store dining.
COVID has pummeled commercial real estate in our country. In major cities like Chicago, office towers stand vacant, stores and restaurants that depend on downtown traffic are shuttered, hotels are empty, condo residents are leaving, and convention centers are sitting unused. The future of commercial real estate depends on factors that owners do not control—the intensity and duration of COVID, availability of a vaccine, the state of the economy, and changing preferences of workers, consumers, and residents. We may be talking about wholesale socioeconomic change, rather than degrees of returning to normal. “If we can’t get back to reopening the economy and people wanting to congregate,” one analyst said, “the attractiveness of all cities is in question.”
Coping with the real-estate upheaval will require strategy of the highest order, including developing sophisticated scenarios for future consumer behavior and tying those scenarios to different business models.
Healthcare is one of the largest sectors in the $16 trillion U.S. commercial real estate market. However, for many years, healthcare organizations have viewed real estate not as a strategy, but primarily as part of the cost structure and service platform. Post-COVID, that viewpoint clearly is changing. The same fundamental questions being put to commercial real estate holders throughout the country are also being put to healthcare organizations.
One set of questions pertains to cost. With uncertainty about demand and revenue moving forward, what cost structure will be necessary and appropriate?
The other set of questions is far broader and more strategic. What is the future of work? How many people need to—or will want to—work on site rather than at home? How will consumers want to access services in the future? How will facility configuration need to change to foster safety and convenience? How will services themselves need to change?
Both the cost and strategy questions are fundamental. And every single answer to these questions has profound implications for the ultimate disposition of healthcare real estate.
In a key scene in the movie The Founder—about Ray Kroc’s creation of McDonald’s—a colleague tells Kroc, “You’re not in the burger business; you’re in the real estate business.” Healthcare organizations need to think of themselves also as being in the real estate business. And although McDonald’s may have a head start on a real estate strategy for a COVID world, America’s hospitals are facing far more complicated real estate strategy and cost decisions.