Investors Plan To Put More Money Into Healthcare

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The I-word, inflation, is bad enough. But then there’s the R-word: recession. And some forecasters see the potential coming forward, according to the latest CNBC Fed Survey.

Not that it’s a given, but the trifecta of inflation, more hawkish Fed monetary policy, and issues coming out of Russia’s invasion of Ukraine have increased the bet to a 33% chance of one in the next 12 months.

That may be what a new CBRE survey picked up on. Distributed to “approximately 500 of healthcare real estate’s most influential healthcare real estate trusts (REITs), institutional healthcare investors, private capital investors, and developers throughout the United States” and responses coming from about a fifth of them, 85% believed that the healthcare real estate industry is “recession resistant.”

“Survey results suggest a very significant increase in capital allocated to healthcare real estate for 2022,” the report said. “In 2021, the total capital allocation provided by respondents in our survey was $10.9 billion, while actual transaction volume for 2021 ended at nearly $16 billion. This year, the total capital allocation from those unique firms who provided a figure (65 out of 86 firms) totaled $17.1 billion, which represents a 57% increase compared to 2021.”

This year, the firms that gave a capital allocation reported $17.1 billion going into 2022, a 57% increase. Given that, CBRE expects investors to allocate at least $25 billion in capital to the sector. Market caps are likely to drop with the capitol going in, and 96% of respondents expected cap rates on Class A on-campus to be below 6% this year, while 79% anticipate the average cap rate will drop below 5.5%.

“This can be ascribed to the ongoing increase in demand for high-quality healthcare real estate, the resiliency of healthcare real estate during the pandemic, and new funding sources actively exploring alternatives to traditional real estate products, such as office, industrial, multifamily and retail,” the report reads.

Similarly, the life science sector is also tremendously strong, with record level venture funding of $32.5 billion in 2021 and in 2022 40% of respondents thinking that life sciences properties, especially those housing biotech or pharma, should see a cap rate below 5%.

As might be expected from these numbers, a big majority—84%—plan to be net buyers of healthcare real estate, including all healthcare REITs and institutional investors that responded. Only 26% of current owners will be net sellers. With that much demand and low interest in dropping net ownership, that describes a coming challenge to obtain additional properties, meaning likely higher prices.

 

Source: GlobeSt.

Investors Target Medical Office In Defensive Play

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Demand for medical office space has mostly normalized, with investors pouring capital into the asset class in what some experts are calling a defensive strategy.

“While some people continue to practice caution amid the emergence of new COVID-19 variants, ultimately many of these appointments must be fulfilled,” Marcus & Millichap’s Alan Pontius writes in a new report. “All the while, the population is aging, which brings along certain medical realities. These factors together underpin the current strong tenant demand for medical offices.”

While traditional offices saw a major rise in vacancy at the onset of the pandemic, medical office vacancy rose just 80 basis points to 9.5% in 2020.  Availability tightened at the tail end of 2020, which drove the average asking rental rate up to $22 per square foot, an increase of nearly 4% from the end of 2019.  Asking rents were highest in San Francisco, followed by New York City, Los Angeles, San Jose, Miami-Dade, Oakland, San Diego, Orange County, Seattle-Tacoma, and Washington, D.C. Meanwhile, vacancy was lowest in 2021 in San Jose, Portland, Louisville, Seattle-Tacoma, and Salt Lake City.

Supply additions expected this year are on par with 2020 figures, with an estimated 9 million square feet of space projected to open this year. Marcus & Millichap predicts that vacancy will decrease to 9.2%, down 20 basis points and 40 basis points above pre-COVID levels.  Meanwhile, the firm predicts rent growth in the neighborhood of 2.5% to an average of $22.61 per square foot, with six markets predicted to hit levels above $30 per square foot led by the Bay Area, New York, Miami-Dad, and Los Angeles.

Staffing shortages remain a headwind for the sector in the short term, as the health crisis continues to hit healthcare worker payrolls. Stated simply, healthcare workers are burned out, and “medical practices are aware of this dilemma,” according to Marcus & Millichap, adding that 73% of those surveyed in a recent national poll ranked staffing as their largest pandemic-related challenge at the start of this year.

“The inability to onboard staff may keep medical practices from expanding this year, combating what are otherwise strong demand tailwinds,” Pontius says.

 

Source: GlobeSt.

The Next Big Thing In Real Estate Investment: Small Businesses, Including Physician Offices

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Small businesses, including physician offices, are the new targets for real estate investors, according to The Wall Street Journal.

Property investors traditionally steered clear of properties housing small businesses because they are riskier; it’s more likely small businesses than big chains will shut down or stop paying rent, according to the Journal.

But a new breed of investors are seeing big opportunities in buying up single-tenant properties where tenants agree to share more information with landlords and prices are typically lower. Keyway, a New York City-based firm, is focused on buying medical office buildings and leasing them back to physicians, which have a lower risk of vacancy than restaurants or retail stores, according to the report.

Keyway has bought around $50 million worth of properties since its founding in 2020 and is in talks to spend another $200 million.

Montecito Medical Real Estate has also built a strategy around acquiring medical office space, with recent transactions including a $12 million building in Chesterfield, Va., and a $21 million building in Virginia Beach, Va., housing both an orthopedic and gastroenterology practice.

 

Source: Becker’s ASC Review