The Risks For New Investors In Healthcare

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There’s a lot to like about the healthcare sector right now.

While other commercial sectors struggled during the recession, healthcare persevered. And, with 10,000 people turning 65 each day and then living longer, demand should remain strong for the sector.

“The overall demand for health care is incredibly high and growing,” David Lari, partner at Cox, Castle & Nicholson LLP tells GlobeSt.com. “Trips to the doctor for healthcare services are high and very likely to continue to increase. The medical sector—doctors, physician groups and hospitals—tend to be pretty good tenants, especially if you compare it to retail, for instance, where a lot of tenants have gone out of business.”

Investors from around the globe see these positive demographic trends. For instance, Lari says Asian investors, in particular, have been targeting American healthcare properties because their populations are also aging.

“By all accounts they understand how senior facilities work, from their experiences in their home country,” Lari says. “We’re also seeing Middle Eastern money coming into various health care facilities as they understand it more and see it as a way to diversify their portfolios. We’re also seeing a lot of large institutional private equity groups and pension fund groups get into the space where maybe they weren’t before.”

While the traditional players—healthcare REITs and institutional players—have the industry knowledge and know the major players and key issues, these newcomers often have to get up to speed. Just because the demographics are pointing in the right direction doesn’t mean they aren’t plenty of risks for healthcare investors.

“I think there are higher barriers to entry than some other classes of real estate, especially when you’re dealing with the acquisition of licensed facilities, such as a hospital, senior living facility or skilled nursing facility,” Lari says. “If you’re dealing with an on-campus medical office building, many of them tend to be ground lease and you need to navigate through those issues.”

Investment groups also need to understand their tenant mix and the long-term desires of the local hospital system when they purchase on-campus buildings.

“In essence you’re doing a joint venture when you’re buying an on-campus asset, which has restrictions with the hospital system,” Lari says. “If you’re not well aware of their short- and long-term plans and how you’re going to fit into those, you could get burnt quite easily.”

Lari says investment groups also need to spend time thinking about tenant acquisition. If they’re banking on getting physician groups to move from far away to their location, they may need to rethink their strategy.

“Typically speaking, physicians and physician groups don’t want to move too far,” Lari says. “If they do, oftentimes they will lose their patient base.”

Healthcare investors also need to be aware of the merger-and-acquisition environment in this era of healthcare consolidation, such as the mergers of Advocate Health Care and Aurora Health Care and Beth Israel Deaconness Medical Center and Lahey Health.

“You need to know how your particular assets fit into the growth strategy of the acquiring entity,” Lari says. “If they’re going to consolidate, don’t need your particular location and are moving physicians and physician groups out of it, then it could be potentially detrimental to the real estate investor.”

Lari doesn’t think these challenges should push investors away from healthcare. They just need to understand that there is going to be a steep learning curve.

“The key is understanding where your asset is in the marketplace and what type of health care services are going to fit within your particular asset,” Lari says.

 

Source: GlobeSt.

The Top Three Reasons Why Healthcare Real Estate Is Recession-Resistant

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This has been a roller coaster of a year when it comes to the economy, and many are talking about the potential of a recession happening very soon.

According to the Conference Board Consumer Confidence Index, August has been just slightly down. Consumer spending makes up 70 percent of the U.S. economy. If sentiment moves down, consumers and purchasing managers begin to curtail spending and an economic slowdown is inevitable.

Unfortunately, the more the news and articles focus on the impending recession, the more it becomes a self-fulfilling prophecy. Other signs that point toward a potential recession include an unemployment rate that is at the lowest point in 49 years, trade wars that are causing material prices to increase, and geopolitical unrest abroad that could have a huge impact on the U.S. economy. On the bright side, wages appear to be moving up, initial unemployment claims remain low, interest rates support continued investment and inflation remains in check.

There is a close correlation between real estate values and the health of the U.S. economy, but like most things, it is quite nuanced. As companies retract and give back space, occupancies fall and therefore so does the value of commercial real estate. This problem is exacerbated when debt covenants are violated and/or maturities occur during a recession, often requiring re-margining of the debt and/or a fire sale to meet an impending maturity.

With all this in mind, one of the safest asset classes in commercial real estate during a recession is medical office. Below are three reasons behind this.

Tenant Retention

Medical tenants tend to be “stickier” than their general office counterparts. This is because landlords and their provider tenants typically make a much higher investment in the physical space and sign longer-term leases.

The current cost of typical West Coast medical tenant improvement is in the mid-$100s per square foot. In a contracting market, landlords are reluctant to make the necessary investment to entice medical tenants to move, and tenants themselves become more resistant to funding tenant improvements in times of economic uncertainty.

Under normal circumstances, medical tenants are “stickier” because they need to maintain a consumer-facing presence, more akin to a retailer. While consumers may cut back on their lattes during a recession, they are less likely to forgo medical attention and, often, services are covered by insurance. Even those consumers that lose their jobs are often covered by government plans, which helps to moderate the impact and allow them to continue seeking medical care when needed.

Demographics

Medical office also has demographics on its side. According to the U.S. Census Bureau, the number of Americans age 65 and older is expected to double over the next three decades.

An aging population requires more healthcare professionals and more space to deliver medical services. The silver tsunami’s demand for healthcare will cause the patient volume to increase beyond what the current infrastructure can support.

A recent article by The National Center for Biotechnology Information reports that patients age 65 or older make up 13.5 percent of the U.S. population, but represent over 45 percent of the utilization of healthcare. As this age cohort swells, we will need more physical space to meet the demand, as well as physicians and other medical practitioners.

Supply And Demand

A substantial rise in capital has occurred in this sector that is tied to a greater awareness and acceptance by investors of the durable income characteristics of medical office. There is up to $5 billion of buying power in this industry, which is reinforced by the need for late-cycle defensive plays in a challenging return environment, according to the August Healthcare Capital Markets Perspective report from JLL managing director Mindy Berman.

Healthcare is part of the wave of capital raised in niche sectors, notably outraising traditional real estate classes by a factor of four to one. An uncertain economic forecast and low interest rates create higher medical office rates and attractive, stable returns.

The supply of healthcare real estate is low; the sector is a fraction of the size of general office. The institutional investors and REITs are long-term owners, while the healthcare systems themselves own upward of 70 percent of the real estate in this space. This limited supply, coupled with the aforementioned capital, makes the space attractive.

The fundamentals of healthcare real estate are solid. Though a recession could be around the corner, Meridian, a developer and investor specializing in healthcare developments, believes real estate will remain a strong investment. An aging demographic, desire for recognizable, accessible space and the fact that demand continuously outweighs supply in this sector all contribute to this viewpoint.

 

Source: REBusiness Online

Healthcare Construction Boom In North Texas: 79% Of New Dallas-Fort Worth Hospitals Landed In Denton And Collin Counties

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With a population of 7 million-plus, including aging baby boomers and young families moving in daily, North Texas is seeing unabated healthcare construction and investment activity, including seven new hospitals topping 800K SF in just the last year.

Medical facilities in the North Dallas suburbs and facilities centered around outpatient services remain the most prized commodities as the Metroplex tries to meet the area’s growing healthcare needs.

“In particular what is going on right now, in addition to the remarkable growth pattern, I think there is a lot of competition among healthcare providers,” Turner Construction Co. Director Steve Whitcraft said.

Whitcraft will be speaking on this topic at Bisnow’s The Future of Dallas Healthcare Real Estate conference Sept. 19.

“You have very strong providers in this market that are all very capable, differentiating themselves to best compete for those family services and also trying to get further out into the community. I think you are going to see more specialty facilities like heart and cancer centers and more satellite-type facilities with unique strengths to growing local neighborhoods,” Whitcraft said.

It is the growing North Dallas suburbs in particular where providers are setting up clinics and hospitals at a healthy pace.

“As the population continues to grow in the area of Collin County — it reached a population of a million this year  — healthcare facilities are expanding to the Planos, the Friscos, the Prospers and the Denton areas where we are seeing a lot of this growth,” McCarthy Building Cos. Vice President of Operations for the Dallas Business Unit Nate Kowallis said.

In fact, counties north of Dallas dominate CoStar’s list of healthcare projects and hospitals under construction.

“Since 2018, the region has added seven hospitals totaling 804K SF of new space,” CoStar Group’s Paul Hendershot said. “Seventy-nine percent is found in Collin and Denton counties, reflecting the high levels of growth in the northern suburbs.”

Healthcare projects under construction in the North Dallas suburbs include Texas Health Hospital Frisco, a collaboration between Texas Health Resources and UT Southwestern Medical Center; Cook Children’s Medical Center in Prosper, Denton County; and a new patient care tower for Texas Health Presbyterian Hospital Allen in Collin County, according to CoStar data.

Dallas-based pediatric hospital Children’s Health acquired a 72-acre parcel at U.S. Highway 380 and the Dallas North Tollway in Prosper earlier this year to construct a medical campus to serve children in the North Dallas suburbs.

Midlothian, a growing South Dallas suburb, has two medical facilities under construction, including Methodist Health System, a 190K SF full-service acute care hospital, CoStar data shows.

Dallas County also remains in play with the McCarthy | Crowther joint venture constructing The Parkland Outpatient Clinic 2 building, a ground-up, six-story clinic on the Parkland Health & Hospital System’s Dallas campus. The HKS-designed project will host a 540K SF breast cancer clinic.

Outpatient Care Maintains A Healthy Pulse

In DFW Despite some of those large projects underway, DFW healthcare investment and construction activity is focused less on larger hospital settings and more on smaller footprints designed to reach residents in DFW submarkets.

“Health systems and providers are increasingly focused on the delivery of care in lower-cost outpatient settings, and convenience for the consumer is of critical importance,” JLL’s Healthcare Capital Markets Group Managing Director Brian Bacharach said. “As DFW continues to expand, there will be increasing demand for outpatient facilities located within the growing communities.”

Even in the investment side of the space, outpatient services remains a primary focus of investors.

“The majority of third-party investment activity has been outpatient-focused, but there is virtually no speculative development in the space,” Bacharach said.

McCarthy’s Kowallis said he is seeing more construction activity in healthcare today focused on smaller facilities outside of major hospitals.

“There’s been a little bit of [construction] growth year over year, but mostly that has been with the medical office buildings, the clinics and the special care facilities,” Kowallis said. “That’s the big trend that we’ve seen, the shift from hospitals to more clinical or outpatient facilities.”

 

Source: Bisnow