Big Obstacles, Big Opportunities: HREI Editorial Advisory Board Members Share Insights For 2022

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Despite a number of headwinds – and some quite worrisome headwinds they are – the juggernaut that is the healthcare real estate (HRE) sector should continue chugging along throughout 2022, according to a group representing some of the best-known and successful firms in the business.

Members of the HREI™ Editorial Advisory Board (EAB), which comprises leaders and executives from firms involved in almost every aspect of the sector, gathered virtually in November to talk about current trends and the state of the industry. While a portion of their discussion was “off the record” in order to promote a free exchange of ideas, they later spoke “on the record” in discussing what they see for the year ahead in HRE.

For the most part, as noted, the HRE space should continue to perform well in the year ahead, in large part because the sector’s facility types, including medical office buildings (MOBs), have proven themselves to be recession-resistant during the COVID-19 pandemic and will remain in high demand from investors.

“Overall, I think the status of the industry is still extremely strong,” said Malcolm Sina, executive chairman of Palm Beach Gardens, Fla.-based Sina Companies. “Why? Because of the fundamentals in our business. (The U.S. population) is getting older. We all need more healthcare services, and more procedures are being done today in outpatient settings than inpatient, which of course is good for all of us in this sector.”

Mr. Sina, however, added that the current problems with “inflation and rising construction costs, as well as labor shortages, all really stem from a worldwide supply chain issue resulting from complications with the COVID-19 pandemic.

“But I believe all of it will start settling down in 2022, but maybe not really settling down until the fourth quarter,” said Sina.

Or course, as HRE facilities have proven themselves to be a safe haven for investors during the pandemic, keen demand from investors has driven pricing as high as ever and, subsequently, cap rates, or first-year estimated returns, as low as ever.

“I have to admit, I’m a little nervous about where MOB pricing has gone and what that means for us as a company, and it is equally difficult for other longstanding HRE companies, as we look to make acquisitions in the next year,” said Stefan Oh, executive VP of acquisitions for Irvine, Calif.-based American Healthcare REIT, a diversified real estate investment trust (REIT) formed in 2021 by the merger of Griffin-American Healthcare REITs III and IV. “MOB pricing is at a level that I never could have imagined it would get to. And I think in order to continue to invest in the space, at least for higher quality MOBs, (HRE firms) are going to have to find ways to lower your cost of capital. And we’re seeing many do that by the formation of partnerships (with large capital investors). Without doing that, it will be very hard to compete for acquiring MOBs.”

Mr. Oh added that he’s “very happy that we are a diversified healthcare REIT, because when pricing gets increasingly tough on MOB space, we can make acquisitions in other asset classes (including senior housing), and that’s what we’ve done, how we ended up building the portfolio that we have.”

Another formula for success when it comes to making acquisitions, especially of MOBs, will be to find “off-market deals,” according to James Schmid, chief investment officer and managing partner with Media, Pa.-based Anchor Health Properties.

“The sector will continue to reward those that can find off-market or lightly marketed opportunities,” Schmid said. “That was the bulk of what we’ve acquired (in 2021, when the firm made acquisitions totaling about $900 million)… So, it pays to be out there in the field making hay on unique business opportunities.”

When it comes to HRE development, the pace of construction starts has dropped a bit since the start of the pandemic, in large part due to complications and delays resulting from increased costs and supply issues. However, even as development has fallen off a bit, the amount of outpatient space absorbed continues to increase and the national MOB vacancy rate continues to drop, according to several EAB members. That means that physician groups and health systems are in need of space to continue to grow their practices and networks in order to bring their services closer to patients. Eventually, this will lead to an increase in HRE developments.

“On development side, I do think that there’s going to be some apprehension (from providers) because of the sticker shock with development costs,” said Peter Westmeyer, CEO of Chicago-based Remedy Medical Properties, a major buyer of MOBs that also has a strong development arm. “However, the demand side for space is going to be strong enough to overcome that sticker shock – at least in some cases. So, I think demand on the development side will continue to be robust.”

Mr. Westmeyer added that the need for new HRE development will be driven by, as other EAB members noted, growing demand for healthcare services in new and growing markets. However, he noted that one headwind that could deter many providers’ growth plans, and prove to be a difficult hurdle for new development projects, is the current labor shortage, including a shortage of healthcare workers.

“The (patient) volumes are there and are rising for a of service providers, but they can’t find workers,” Westmeyer said. “I talked to somebody in Iowa who said they can only find six people and they need 30. The demand is there, but they just literally can’t find the people, or the people are too expensive, as I’ve heard about wild upswings in nursing salaries and for temporary nurses that are prohibitive for the growth that the demand suggests should be there.”

And yet, Mr. Westmeyer noted, he remains upbeat about the overall HRE sector.

“There are some headwinds, sure, but I like where our firm is sitting as a company and where the sector is at moving forward,” Westmeyer said.

Mr. Westmeyer is not even all that deterred by the rise in pricing for MOB acquisitions, which is causing some headwinds.

“But I do think, frankly, that maybe we’ve all been spoiled with our strong risk-adjusted returns, which have been, and still are, very favorably risk-adjusted returns compared to other asset classes,” said Westmeyer. “I think it is still mispriced, frankly. Because either the other asset classes are priced too high or we’re priced too low, but there’s some sort of mispriced element in the market, from my perspective, when you look at risk-adjusted returns.”

More On MOB Pricing

Darryl Freling, co-founder and managing principal of Dallas-based MedProperties Realty Advisors LLC, said he agreed with what Mr. Westmeyer, and others, said about pricing for MOB purchases, noting that as long as demand remains strong for the product type and new investors, including institutional capital continue to pursue HRE properties, cap rates will continue to drop.

“I’m of the personal opinion that healthcare real estate, while trading at historically low cap rates and high prices, is still less expensive than some of the other favored asset classes,” Freling said. “And, so as long as that differential exists, even though it has been narrowing, but as long as it exists, we’ll continue to see cap rates come down.”

There is the possibility, he noted, that if cap rates rise in some of the other highly sought-after real estate classes, such as industrial and multifamily, some of the HRE sector’s newest investors might “rotate some of that capital out of the space.

“But my own personal belief is that a lot of that capital flow is more permanent than not,” Freling added.

He noted that while pricing is indeed “clearly historically high right now, debt is also very, very low, and as a result we can still make our returns work. So, for us as a firm, having sources of capital and the lowest cost of capital possible is important for us in terms of maintaining our ability to compete.”

MOB Sales To Remain Strong In 2022

At the time of the EAB virtual meeting in mid-November, it was quite clear that the MOB sales volume for 2021 was going to be strong. Since then, information from HRE data firm Revista, which provides a wide range of information for its subscribers, indicates that 2021 will see a total MOB sales volume that will likely top $14 billion, perhaps approaching $15 billion. That would make it the second strongest year on record.

Christopher “Chris” Bodnar, vice chairman of the U.S. Healthcare and Life Science Capital Markets team with Dallas-based CBRE Group Inc. (NYSE: CBRE), said that while many business professionals are speculating that the stock markets will see a correction in the coming year, he does not see such an event as one that would necessarily slow down MOB sales.

“There is a lot of chatter in the market about a coming correction,” Mr. Bodnar said. “There are a lot of moving parts to this. The stock market’s at an all-time high while inflation is at a 30-year high. If anything is going to happen, it could be in the next 12 months, it could be in the next 36 months. I don’t know. But I think the question that we all like to ask is, you know, where would you want to put your money? Obviously, cash is not a great spot in an inflationary market. Instead, you want to put your money in hard assets to protect against inflation. You want assets with minimal ties to macroeconomic factors, assets that many countries outside of ours would consider basic infrastructure. And that includes healthcare real estate.”

While the supply of MOBs for sale is not likely to keep up with demand in the coming year or longer, that is not likely to slow the pace of transactions, Mr. Bodnar noted.

“Also, HRE is a very niche market and I think that that’s really going to protect us, too,” Bodnar added. “I think that for the foreseeable future, this is the place (where investors are going to put their money).”

Mindy Berman, senior managing director and co-leader of the National Healthcare Group with Chicago-based Jones Lang LaSalle Inc.said that the MOB sales sector is going to remain strong, in large part because of all the institutional capital entering the space.

Much of that new capital, she noted, is entering the sector by forming partnerships with long-standing HRE developers and full-service firms. Many of those partnerships are launched with recapitalizations of an HRE firm’s portfolio, or a portion of its portfolio.

“The amount of liquidity entering the sector is unprecedented,” Ms. Berman said, “and while that’s the macro-real estate theme, it is also a testimony to healthcare in general and also the coming of age of medical office from an investor perspective. The performance of the asset class during the pandemic has been the icing on the cake. The prime example of this is that there are far more recapitalizations in the sector than ever before, because the large new institutional investors really need to come in and buy scale, and they need to do it with an established operator that knows the space and really understands healthcare. All of this is a good sign for healthcare, and likewise there is a huge growth potential for service providers in the sector, and I’ll count JLL among them.”

More On HRE Development

When it comes to development, one of the strengths of the HRE sector is that it is typically not overdeveloped, according to EAB members.

“Development is picking up, though it is relatively controlled,” said Jonathan “John” Winer, senior managing director and chief investment officer with long-time HRE investment firm Seavest Healthcare Properties, which is based in White Plains, N.Y. “I would say, and I think most people in the sector would agree, that it is effectively a build-to-suit development industry at this point.”

Mr. Freling of MedProperties Realty Advisors noted that if there is a headwind facing development it is the “rising cost of construction” and the subsequent increase in rents that owners must charge to their healthcare tenants.

“Unlike in other industries in which, whenever you are in a good economy, the businesses themselves are doing well, the commercial office tenants are doing well, those businesses can typically afford to pay higher rents,” said Freling. “But that’s not the case with healthcare providers. For them, their revenues, for the most part, are going down and their costs are going up. There’s just a limit to how much they can pay in rents. So, that’s going to really squeeze development yields and I do have some concerns there. But I do think this is one area where HRE firms with national platforms and institutional capital partners have more of an ability to scale and are probably in a better position and have a little bit of an advantage.”

As far as Sharon Harper, the CEO of Peoria, Ariz.-based Plaza Companies, is concerned, the HRE sector, including the development business, involves much more than just MOBs these days.

“I define the healthcare industry and healthcare real estate as medical office buildings, bioscience and technology facilities, senior housing and healthcare education,” Ms. Harper said. “And we at Plaza Companies are involved in every single one of those components. But it really does all come back to healthcare and wellness, and serving people, etc.”

She noted that as Arizona continues to see “tremendous growth, as is the case with many U.S. states, especially those in the Sunbelt, where there continues to be an increased need for new facilities across all aspects of healthcare.

“We have to feed the pipeline,” Ms. Harper said. “So, education, universities, training programs should be on everyone’s radar. That is really how we’re going to ultimately fill our buildings and serve our populations. That’s been a big platform for our company, working with Arizona State University, Creighton University, building their medical center, helping to train the people that are going to be serving in our hospitals and be tenants in our buildings. We have a lot of activity.”

Ms. Harper noted, however, that rising material and labor costs associated with the development and construction of healthcare facilities are causing Plaza Companies to constantly to reprice projects.

“We all know this, but rental rates haven’t quite caught up to these rising costs,” said Harper. “However, the tenants are starting to understand that these two are tied together. The higher costs and the longer time that it takes to deliver projects are starting to be reflected in rental rates.”

Eric Fischer, managing director in the Washington, D.C., office of Dallas-based Trammell Crow Company, said the firm’s healthcare project pipeline in the D.C. region is very “bullish.”

“As I look at our 2022 business plan right now, I’ve got roughly 11 projects, with about $2.7 billion of managed costs, fairly evenly divided between healthcare, life science and senior living projects, said Fischer. “In my estimation, healthcare is outperforming. We’re very pleased with where we are in terms of those projects and the lease-ups that are getting underway with those developments. It’s a good sign. On the senior living side, we’ve been able to pass through some very important and strategic rent escalations to account for this acute inflation that we’re experiencing, including labor supply. And likewise in life science, which is something we’re really embarking on, I’ve been very pleased with the capital and liquidity.”

However, like some other EAB members, Mr. Fischer noted that he is a bit cautious about certain economic conditions on the horizon in 2022, as this “acute episode of inflation worries us, whether it’s a long-term trend or just some stagflation. It could be a tough environment, even though it is yet to be determined.

“For now, however, we’re very pleased with the current environment and the opportunities, and we’re really grateful to our capital partners and likewise our lenders, as the liquidity in this sector remains unprecedented. It really is, for us, fueling some very exciting opportunities,” said Fischer.

An Attorney Among The EAB

All of the activity taking place in the HRE sector is certainly a positive occurrence for professionals such as Andy Dow, an attorney and chair of the Real Estate Industry Group with Dallas-based Winstead PC, a corporate law firm with a national platform. Mr. Dow is heavily focused on the HRE sector.

“It’s been pretty crazy for us in a number of respects,” Mr. Dow said, “First of all, the volume of deals happening in 2021, particularly in the last half of the year, has been incredible. Secondly, the size of the deals have increased a lot, as there are so many more portfolio sales, recapitalizations, multi-property types of deals. But the biggest change I’ve seen is the velocity of the deals from start to finish has really picked up. We’re seeing compressed inspection periods, compressed times to close on transactions, which is really putting a strain on third-party providers in terms of getting those surveys and environmental reports and everything done on time.”

Mr. Dow expects this frenzied activity to continue for a period of time, adding that perhaps the compressed timeframes for deals are being driven by “a fear out there that some kind of Black Swan event could take place and, you know, time also kills deals and that’s probably no more true than today. To me, it looks like a lot of people are kind of waiting for that other shoe to drop and they want to make sure that they get these things done before something like that happens.”

Overall Outlook, Other Thoughts

As Shawn Janus, national director of healthcare for Seattle-based Colliers International looks to the future, he says the fact that more and more health systems and providers are turning to firms such as Colliers to help them develop overall real estate strategies is a good sign.

“We’ve seen tremendous growth in 2021 on the leasing side of our business, both on the tenant rep side and on the agency side,” Mr. Janus said. “And that’s a good thing, although I would add that while it is definitely important, it is, for the most part, kind of a short-term effect. From my perspective, our biggest increase in business has been, in what hopefully will be a longer-term effect, the fact that healthcare providers, the systems and the hospitals, are talking more strategically with us and actually getting us involved, asking us to help them understand more of what is going on in the industry. They’re telling us what their goals and objectives are and asking us to help them determine how real estate solutions can help them further those objectives, both from a healthcare perspective and also from an organizational perspective. They’re leaning on us to be more of the experts in the field, and I’m very bullish in terms of what could happen in this regard as we move into 2022 and beyond.”

Roni Soffer, founder and managing partner of Hallandale Beach, Fla.-based TopMed Realty, said that while he is concerned about the possible effects that inflation and a potential decrease in the “value of cash” could have on the sector, his firm “continues to grow by being very nimble and always willing to think outside of the box.

“We get very excited when we see a property which is not fully in a specific bucket,” said Soffer. “As we move forward, we will not compromise on finding properties in great locations, and we will diversify property types in looking at healthcare, research, academic medical – it’s all the same family. If you can find all of them one location, it’s a winner, and we’ll continue to look for these opportunities and continue to be very specific about how much we’re paying versus the replacement costs, which we believe this is the one element that can help us, along with being in the right location, to continue and be competitive on the market.”

Jim Kornick, principal and co-leader of the Healthcare Capital Markets group in the Washington, D.C., office of Toronto-based Avison Young, said that he has been predicting there would be a strong uptick in demand for healthcare services, and subsequently healthcare facility space, in the aftermath of the COVID-19 pandemic.

“And this is in addition to the availability of capital and is actually in addition to our usual story about the aging demographics of the country,” Kornick said. “Instead, I’m talking about all of the deferred procedures and damage done from a lack of managed control of chronic diseases and the damage done by the long-term effects of COVID. All of these are going to increase demand for services and space. Perhaps the only thing that can stop the development of new facilities, he said, is an ongoing labor shortage. We were facing a critical shortage of healthcare workers even before the pandemic, as well as before the Great Resignation. And you know, I think that’s like the only cloud on the horizon for the expansion of healthcare delivery and the demand for space. As for Avison Young, the firm’s healthcare arm will greatly increase the services it provides to health systems and other providers in 2022. We’re really strengthening our offerings, including providing data that is more valuable for our clients, helping them make decisions, including decisions about real estate. We’re also working hard to integrate our folks who deal with occupiers, healthcare occupiers, and the investor side.”

Some Final Thoughts

Mr. Winer of Seavest Healthcare Properties noted that the overall HRE sector, despite certain headwinds that include a high rate of inflation — which can cause “concern for the markets and concern for investors — the basic performance of the medical office and ambulatory sector will remain strong.”

“COVID has had an impressive effect on the industry because it confirmed the necessity for outpatient facilities and the importance of such facilities,” said Mr. Winer. “The asset class performed very well throughout the past year. And, if you look at the fundamentals of our business, they’re very healthy.”

For those who are concerned about a potential market correction, or perhaps other economic pitfalls, Mr. Bodnar of CBRE provided an interesting perspective.

“Our healthcare industry, we at CBRE truly believe, is too big to fail,” Bodnar said. “And so, if you’re an investor you have to kind of think about that. I also think that Sharon (Harper of Plaza Companies) is correct in that, you know, the growth of academic medical centers is not going to slow down anytime soon. There is a money grab right now by venture capital, or for venture capital money and through NIH funding, and the footprint of these academic medical centers is going to continue to get bigger.”

Ms. Berman of JLL noted that while the sector is currently going strong and MOB sales should remain quite active, she is a “little concerned, but just broadly, about volatility and financial markets and investment markets what with the inflationary impact, rising interest rates, etc.”

“That could turn into a macro issue,” Berman said, “So, while medical office is fantastic right now, I think other asset classes may attract relatively more capital because of inherent qualities that they have. So, a little concern about that, as I feel the risk of something coming out of the blue and biting our sector could happen. I’m just kind of keeping my eye out for that, even though I’m not sure what any of us could do about it, but I feel like we’re susceptible to that.”

Mr. Schmid of Anchor Health Properties was one of the only EAB members to bring up the topic of politics, as well as professional sports.

“For next year, the mid-term elections, I think the Republicans will take back, well at least the House (of Representatives), if not the Senate as well,” Schmid said. “I think the Golden State Warriors will win the NBA championship, and I think the Kansas City Chiefs will win the NFL Super Bowl. And those are my projections for the New Year. I wish everybody the best (in the year to come).”

 

Source: HREI

2021 Health Care Real Estate Year In Review

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This was another dynamic year for the health care industry and for health care real estate, which is demonstrating remarkable resiliency and innovative success in the face of unprecedented challenges.

Below is a summary of a number of key 2021 takeaways and trends that were discussed during our 2021 Health Care Real Estate Year in Review webinar, now available on our podcast channel by clicking here.

Academic Medical Centers

Academic medical centers (“AMCs”) (or health systems affiliated with an AMC) continued to lead large-scale “destination” medical center development projects in 2021. Several multi-billion-dollar projects anchored by AMCs were either announced or broke ground this year in regions across the country. The projects include a range of uses, including new outpatient clinics, ambulatory surgery centers, inpatient hospital expansions and, in some cases, non-medical uses such as housing and fitness facilities. The health care campus of the future is here!

Ambulatory Surgery Centers

Ambulatory surgery centers (“ASCs”) have come into their own with many of the major health systems looking to acquire or form partnerships with ASC owners and operators. This is driven, in part, by payors and patients demanding that more surgical services be provided in lower acuity settings. In 2021, over 200 new ASCs were opened or announced according to Becker’s ASC Review. Florida, Arizona, New York, Texas, Pennsylvania and Michigan topped the list with the most new announcements. In other ASC news, the trend towards convergence of payor, provider and operator continues. A number of for-profit payors and providers have gone on ASC buying sprees this year.

Supply Chain And Labor Shortages

Supply chain disruptions and labor shortages are tempering the pace of health care construction. The staffing, supply and hospital-bed shortages that health care providers and real estate developers hoped were temporary now appear to be longer-term challenges that will reshape hospital real estate and development projects well into 2022. The construction industry is not immune to labor disruptions triggered by ongoing COVID-19 challenges, which is resulting in delays for new hospital and development projects as contractors work to find qualified workers. By one estimate, contractors will need to hire 430,000 more employees in 2022 and 1 million more in the next two years to keep up with the increased project demand. If contractors do not meet those metrics, health systems should expect and plan for delays to their upcoming projects.

Construction industry supply chain challenges, like labor shortages, will continue to impact hospital projects heading into next year. Although demand for new projects continues to be strong, supply chain issues are causing health systems and developers to approach delivery timelines and project cost estimates with an added level of caution. Some of the major general contractors are shifting the risk of delays and cost overruns for supply chain issues to owners and developers. In response to ongoing supply chain challenges, some health systems have begun evaluating the use of a centralized service model using a Consolidated Service Center (“CSC”) to manage certain supply chain needs. Although typically evaluated in the context of operational supply chain needs, the CSC model could be evaluated in the context of facilities planning, as well.

Certificate Of Need Programs

In the wake of the COVID-19 pandemic, with many hospitals at or nearing capacity, many states have either relaxed or suspended certificate of need (“CON”) requirements, triggering significant new facility announcements. In Florida, for example, over $1 billion of new facilities have been announced in the last quarter of this year.

Telehealth

At the height of the pandemic, some experts claimed the physician office visit would be a thing of the past. Now, over a year later, we see telehealth stabilized nearly four times higher than pre-COVID, but not replacing the office visit. Telehealth visits appear to have stabilized at a range of 13% to 17% of visits across all specialties. The specialties experiencing the highest growth in telehealth usage include psychiatry and substance-use treatment. Consumer demand for virtual care solutions, however, continues to be strong. According to an AHA report, between 40% and 60% of consumers want more virtual care solutions, such as a “digital front door” or lower-cost virtual health plans. That said, the regulatory and reimbursement environment for telehealth remains uncertain, giving reason to temper growth predictions for the immediate future.

Hospital-Based Property Tax Exemptions And Government Intervention

Local government is continuing to take aim at nonprofit hospitals and health systems with respect to property tax exemptions and other real estate-related issues. In a widely watched case, a trial court decision in Pennsylvania ruled that three nonprofit hospitals were not tax‑exempt charities entitled to property tax exemption. The ruling has triggered local governments and school districts around the state to reconsider health care- and hospital-based property tax exemptions. In another closely watched governmental action, the State of New Jersey has proposed legislation that would require state approval for the termination of a hospital lease. The legislation, although aimed at one particular hospital, raises interesting issues of governmental authority, and legislation of this type could have far-reaching impacts.

Regulatory Matters

Qui Tam Lawsuits – Litigation under the False Claims Act has been on an uptick under the Biden Administration. The year 2020 saw the largest number of new matters initiated in a single year; and, although year-end numbers have not been released yet for fiscal year 2021, we expect to see that trend continue upwards. OIG self-disclosure settlement data indicates that remuneration and fair market value, together, represent nearly 70% of all cases. Settlement figures continue to be significant, ranging in recent years from $4 million for office leases not complying with the Stark Law up to $93.5 million for a hospital offering free office space to a physician group.

CMS Vaccine Mandate – On November 4, 2021, CMS released its Interim Final Rule (“IFR”) requiring COVID-19 vaccinations for individuals working in Medicare and Medicaid participating facilities, as well as individuals working in certain other settings involving face-to-face interactions with patients. The IFR effective date was December 5, 2021; however, legal challenges have enjoined enforcement in many states. Most recently, in an unprecedented move, the U.S. Supreme Court announced it will hear oral argument on an emergency application on January 7, 2022. The court’s order to hear oral argument on the issue demonstrates the perceived legal and practical importance of the federal government’s IFR.

Health Care Real Estate – Capital Trends

Historically low interest rates for taxable and tax-exempt debt continue to give hospitals and health systems flexibility in financing capital projects. Hospitals are seeing historically low rent factors and, increasingly, are taking more direct financial control of their real estate assets through direct placements and non-traditional financing mechanisms. Capital competition for core, quality, hospital-sponsored medical office buildings continues to be strong in light of supply-side shortages. On the other hand, skilled nursing and senior housing projects are facing a different set of challenges in terms of sourcing equity and debt. In a recent survey from Hilltop Securities, investors expressed the most concern with senior housing and skilled nursing sectors when compared to other industry sectors. This means investors and lenders will continue to take a more conservative approach to underwriting senior housing and skilled nursing projects heading into 2022.

Medical Office Buildings

The Medical Office Building (“MOB”) continues to demonstrate resiliency relative to other asset classes. Based on trading earlier this year, we expect final 2021 figures to show MOB sales volume having bounced back to pre-pandemic or near pre-pandemic levels, especially in sunbelt markets. As health care continues its shift away from inpatient care models, and as the traditional (non-medical) commercial office market continues to experience uncertainty, demand for MOB investment is predicted to remain strong.

Life Sciences

Over the last 18 months, governmental entities and private investors have pumped billions of dollars into the life sciences industry. A CBRE report found investments from venture capital into the life sciences industry last year totaled a record-breaking $17.8 billion through the second quarter of 2020 and anticipated funding from the National Institutes of Health to grow 6% from the prior year ($42 billion total). As a result, the demand for real estate to support that uptick in life sciences work also increased. The amount of laboratory space grew by 12% in 2020, with 95 million square feet of laboratory space in the United States and another 11 million under construction. It makes sense, therefore, that one recent market survey ranked life sciences and biotech as the best risk-adjusted health care real estate opportunity, significantly outperforming medical office buildings and senior housing. Because COVID-19 testing is widely available and vaccine availability is increasing, capital investment for research and development related to COVID-19 and other infectious diseases is likely to continue. As a result, the demand for real estate to support that research and development should also continue.

Medtail

Medtail — a relatively new term referring to the combination of medical and retail — has continued to gain traction this year. As health care consumers continue to seek convenience care options, expect the medtail trend to continue. In 2021, discount retailer Dollar General joined other retail giants like Walgreens and CVS when it announced the hiring of its first chief medical officer who will be tasked with expanding affordable health care services through Dollar General stores, especially those in rural communities.

Senior Housing

After a difficult two years, experts are predicting increased investment activity in this sector in 2022, even with forecasted occupancy levels not reaching pre-pandemic levels until late 2022. Senior Housing News estimates by 2029, there will be 14.4 million middle-income seniors. Providing affordable senior housing will continue to be one of the biggest opportunities and challenges, as 54% of the middle-income seniors will lack resources to pay market senior housing rates according to the same Senior Housing News report. Expect the post-pandemic changes to the senior housing industry to include:

• Hiring new clinical staff and bolstering on-site clinical services offered at senior housing locations;

• Expanding telehealth options for residents to reduce travel to off-site inpatient and outpatient facilities;

• Permanently installing and implementing disease and infection prevention policies and procedures to control future outbreaks; and

• Focusing on active living communities to better balance socialization and privacy, thereby avoiding the isolation many residents experienced during the pandemic.

The COVID-19 pandemic will not only affect the construction and operation of senior housing, but also the location of these facilities. During the pandemic, millions of people moved from large urban areas to less populated locations in middle and smaller markets around the nation. Many of these markets offer a lower cost of living and a warmer climate that may attract aging populations as compared to more densely populated areas. As a result, expect more development in those markets to align with the aging population’s migration trends.

Finally, a number of senior housing developers have started to offer “ultra luxury” senior housing products in certain markets. These facilities often include private chefs, personal butlers and premium design features and are targeting elite members with monthly fees up to $20,000 on top of entrance fees of $200,000.

Skilled Nursing Facilities

Despite a difficult two years and ongoing operational challenges, Skilled Nursing Facilities (“SNFs”) could see some modest relief in 2022; although, it is likely to remain a challenging environment for the near term. Earlier this year, it was announced that nursing homes would receive a 1.2% net Medicare increase for fiscal year 2022 under a proposal announced by CMS, which would result in an estimated $410 million much‑needed financial boost to SNF operators. According to the final rule, due to the ongoing public health emergency, CMS will also suppress the SNF 30-day all cause readmission measure for the FY 2022 value-based purchasing program year.

Social Determinants Of Health; Housing Is Health Care

Social Determinants of Health (“SDOH”) continue to gain traction with hospitals and health care providers. Last year, we reported on focus areas addressing homelessness and affordable housing, with some providers emphasizing “housing is health care.” We saw that momentum continue this year, with a number of major health care-anchored housing investments around the country. At this year’s HLTH 2021 Conference, executives from several major health systems highlighted affordable housing as a key health care intervention strategy. As a relatively flexible and tangible community benefits investment strategy, affordable housing is increasingly popular with hospitals and health systems. The early data on these programs show promising results. A March 2021 analysis of one hospital system’s affordable housing program, which includes over 800 affordable housing units, found a social return between $1.30 and $1.92 for every dollar spent operating those units. There is still a dearth of research about the social and economic returns of affordable housing and other social determinants programs, but expect more providers to invest in these types of programs if future data supports results like the March 2021 study. At the federal level, the Aligning for Health Consortium was successful introducing the Social Determinants Accelerator Act of 2021, a bipartisan bill designed to help states and communities develop strategies to better address SDOH and improve health outcomes.

 

Source: Lexology

Look Who’s Investing In Healthcare

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Commercial real estate has been in a whirlwind.

Industrial properties are incredibly hot—and expensive with subterranean cap rates. Multifamily is nearly as in demand, but many keep wondering if the end of federal Covid unemployment assistance combined with significant unemployment and the Delta variant could pull a rug out from under the sector.

You could look at the office and wonder when companies will be fully back; retail and remember e-commerce continues to grow; self-storage and ask when demand could max out; or you could look for a different investment prescription.

Medical real estate has a lot going for it: an economic sector that represents 17.7% of U.S. GDP, tenants with high credit and financial strength, and a customer base for which services are a literal matter of life and death.

“There’s always been investors with a healthcare strategy,” Andrew Twito, vice president of capital markets at Ryan Companies, says. “In the last 12 to 18 months, essentially every type of investor has been evaluating the sector. What they’re finding now is it’s an attractive place to deploy capital because it’s a defensive sector during a recession. People still get sick, they still have to go to the hospital, and they still have to get treated.”

Medical also means following big changes in healthcare delivery and structures and facing popular distrust in skilled nursing and elder care segments. Opportunity, for those who want to jump in, needs some preparation and a reexamination of the landscape.

Transformation Of The Medical Office

“Medical office is doing well,” Bo Stuart, a senior associate at Transwestern’s Southeast healthcare advisory services team, tells GlobeSt.com. “It started coming out of the pandemic earlier than certain product types and there was less uncertainty.”

The cap rates are relatively good compared to, say, threes in industrial.

“I’ve seen anywhere from stuff in the fours to a lot of stuff in the fives,” says Ben Reinberg, founder and CEO of Alliance Consolidated Group of Companies. “You have short term leases that trade in the sixes and sevens.”

Investment rewards are nothing new to those with experience investing in the sector. John Wilson, president of HSA PrimeCare, points out that the medical office building, or MOB, sector performed well in the financial crisis of 2008 through 2012.

“It not only remains strong, but I think the pandemic has accelerated the growth and number of investors and it’s brought new capital because of some of the fundamentals of the space, comparing it to general office,” Wilson says. “General office is still facing the uncertainty of employees coming back, when they’re going to come back, how many are going to come back. Medical office shows more clarity in long-term demand.”

This hasn’t been a surprise to those like Robert Atkins, a principal at Atkins Companies, whose multigenerational family firm, with 700,000 square feet of medical office space, was in MOB “way before it was considered a separate asset class.”

“Having a lot of different asset classes through the years, residential, retail, general office, we decided years ago to focus almost exclusively on medical office,” Atkins says. “We believed it was one of the most attractive and stable asset classes in our experience through the various peaks and valleys of the real estate market.”

However, for all the benefits, this isn’t a market to nonchalantly enter.

“Healthcare is a very complex industry,” says Alfonzo Leon, CIO, Global Medical REIT, who has been in the space since 2005. “The thing that always stood out for me when I compared it to apartments or office or retail, it takes a long time to make sense of the healthcare landscape. Apartments are pretty straightforward, with a lot of demographic analysis. In healthcare, you also have demographic analysis, but it’s more complex. There are relationships between hospitals and physicians, payment issues, a lot of regional stuff, each city has its own dynamic and history. Then you get into the insurance companies. I felt like it took me five years to feel I understood what I was looking at and what the risks were.”

For example, demographics will direct which types of practices will thrive in specific areas. As the dynamics of the relationships change, so do the fundamentals of associated real estate investment.

“If you go back 20 or 25 years, you had mom and pop practices,” says Wilson. That is increasingly rare.

Atkins has watched the evolution of single practitioners getting swallowed up by larger medical practices or hospitals.

“It’s almost impossible now for a young doctor to come out and hang his shingle,” Atkins says, because the economics are unfeasible with student debt, insurance, and the cost to buy or establish a new practice. “The only single practitioners and single groups you see are the old timers finishing out their careers and who don’t want to get involved with the larger groups.”

Where once the primary tenants for medical offices were small practices, now it’s large-scale medical systems, hospitals, and private equity groups acquiring specialty practices.

“We’re in North Jersey in Essex county,” Atkins says. “Our home office is in the building but we’re the only non-medical office.” The tenant next door was an oral surgery group of four doctors, with multiple locations, reaching retirement. “They sold out to a younger oral surgeon, an aggressive guy buying a bunch of these practices, and he just re-upped on a new 10-year lease. This group of doctors had a strong reputation.” The young doctor wanted to keep it.

But such examples are minor compared to the larger healthcare industry forces at work, which are visible in both leasing and construction.

New Developments And Leasing

“There’s a backlog of projects,” says Doug King, national healthcare sector leader at Project Management Advisors. “Healthcare, there’s a backlog of projects that were probably already on their radar.” “What clients are building are the outpatient or ambulatory care facilities being planted in neighborhoods in urban areas. They’re outpatient services, but also have diagnostics or treatments that are fairly sophisticated. There’s a fair amount of money out there for community health and public health.”

There are even moves to have some overnight beds.

“They’re allowing observation beds in some areas so you’re able to do them in a lower cost structure and keep the patient safe,” says William Colgan, a managing partner at CHA Partners.

The same pattern appears in leasing, as large organizations set up treatment centers that are far less expensive to run than traditional hospitals but with enough resources to provide more expansive care than clinics.

“You see money migrating to those types of facilities,” Colgan says. “Smaller types of office buildings are less attractive. The larger, consolidated healthcare services under one roof for convenience is where you find money chasing. What used to happen in healthcare, every doc was an entrepreneur. We have a whole new generation of docs that are all employees.”

The change in healthcare delivery—due largely because of the complexities and realities of much more “risk-based reimbursement” of providers, as Colgan notes—has changed what potential tenants want in buildings.

“The old-style medical office building had small suites,” says Mindy Berman, senior managing director and co-head of JLL’s healthcare capital markets group. “Some of them are in good real estate locations and will be adapted, not that hard. These newer models need more infrastructure.” Heavier equipment requires more floor load and power.

Even the number of columns, column spacing, and floor to ceiling height become important.

“If you get an eight or eight-and-a-half foot ceiling, it’s somewhat confining,” HSA PrimeCare’s Wilson says.

More space also reduces the anxiety levels of patients, improving the experience and presumably making them more likely to come back rather than to choose another facility.

Skilled Nursing And Senior Care

There are long-term forces at work in skilled nursing and senior care as well, but also shorter-term reactions to pandemic experiences. Think of all the stories about nursing home residents dying from Covid-19.

“Every two to six weeks you see a New York Times story about nursing homes,” says Don Husi, a managing director of privately-held investment bank Ziegler, which does a lot of work in healthcare and senior living. “There’s a group of people out there doing their best to give our industry a bad name without outlining the good things we’re doing.”

Husi and some others in that part of the industry thought that ultimately the criticism was forced and ignored the origins of the problems.

“No one knew where the numbers were going to go, and you can’t discharge somebody out of a hospital to nowhere,” Colgan says. “If you receive them from a nursing home, where do you discharge them to? The governor’s mandating you send people back to free up beds. No one knew how long these people could infect other residents. The most vulnerable people were the ones affected by covid and we cohort the most vulnerable into one facility. It’s unclear whether things would have been as bad if the people had been dispersed and not concentrated.”

The impact on the segment was sharp and difficult. Colgan pointed to the State of New Jersey considering a requirement that everyone had to be in a private room.

“If investing in a large nursing home and 70% of the beds are two to a room—these are Medicaid patients—think about the amount of revenue they’ll lose if they’re in private rooms,” Colgan says. Then there were discussions of a 100% air exchange. “Could you imagine taking 10-degree temperature air and having to heat it to 72 to make it comfortable for a senior? The amount of energy you need is through the roof.”

Investors took notice.

“Generally, what you’ve seen from the REIT market is repositioning their portfolios to position themselves for growth in a post-Covid world, if there is such a thing,” Husi says. “You look at HealthPeak, who sold off all their independent living portfolio. But they like for-profit entrance fee communities.”

While the criticisms and potential for additional expenses, with resulting lower margins, was one reason, there was another.

“If you’re a publicly-traded REIT, just speaking to that market, it was an opportunity or excuse to reposition your assets and look to the future,” says Husi. “If we get through the next 24 months, our senior housing and care industry is going to do very well just because of demographics and the lack of new properties coming online. Pre-covid, we were overbuilt. There will be less overbuilding because it’s more difficult to get a construction loan for senior living. There are new buildings going up, but it’s at a much slower pace than pre-covid.”

There are also other challenges for skilled nursing and senior living. Labor shortages are causing issues.

“I think medical office buildings right now look attractive more so than skilled nursing facilities,” Iman Brivanlou, managing director of high-income equities at TCW and the TCW Global Real Estate Fund, tells GlobeSt.com. “Those, especially the operators there, are being decimated by labor costs. They’re dealing with operational pressures that are going to be more pronounced than people think. Senior housing is catching a little improvement because occupancies are increasing.”

But with problems and resultant falling values come those that want some bargains while they still last.

“For the first time I’m starting to hear different kinds of groups—that would be large private equity, REITs, large family offices, strategic investors in seniors housing— talking about wanting to make large portfolio and platform acquisitions again after taking a long pause,” Ted Flagg, senior managing director and co-head of JLL’s healthcare capital markets group, tells GlobeSt.com about communications starting in late summer. “I’m hearing that from enough smart money that something interesting must be happening out there to cause that.”

“We’ve seen real increases starting around April through August and September, with August being a real kick up even from the average occupancy pickups of April through mid-summer and July,” Flagg adds.

He sees performance for senior care and skilled nursing as taking a turn toward the positive over the last quarter or so. There are also expectations of a cyclical bull market, given baby boomer demographic waves coming and the reduction of supply during the pandemic.

“I think there is no doubt from most smart money that the next five years are going to be significantly up in terms of NOI, pricing, occupancy, and everything else,” Flagg says. “The real question is around what the time and what is the pace of that increase. Is it next year, two years from now, today? People are thinking in terms of the right entry point. Strategic players are starting to come to the table and what’s available in terms of reasonable acquisitions today.”

In other words, 2022 has the potential for being an inflection point and possibly a time to buy into these asset types, just as values are tipping toward a rise. Or it could be too early.

It’s just another way that healthcare might tempt and then taunt CRE in 2022. There’s medical office space going through transitions, with those trying to jump on having to negotiate a steep learning curve. Then skilled nursing and senior living make a comeback … at some point.

But, more importantly, there’s a sector that’s been an alternative to other CRE types for years. One where there are longer-term leases, clientele that can’t just shrug off getting services, providers that are long-term with great credit, and an industry that’s closing in on almost a fifth of the GDP of the largest economy currently in the world.

Nothing is guaranteed or easy but making good investments in medical real estate seems like a good treatment plan for lower alternative yields. Who’s investing in medical CRE? Maybe the answer should be you.

 

Source: GlobeSt