Foreign Cash, Loose Capital Is Bolstering Healthcare Real Estate

/in , , /by

A confluence of factors is feeding demand for healthcare real estate, including robust domestic demand, related interest from investors outside the U.S. and relatively easy access to capital.

The rapidly ascending ambulatory sector—one of several trends impacting the undulating healthcare real estate landscape—is feeding a booming medical office market. That, in turn, has drawn increased foreign investment and loosened the purse strings on a vast supply of capital that also has fueled construction and mergers and acquisitions.

“While foreign investment isn’t yet significant enough to dictate a change in medical office pricing or supply and demand, it could eventually shift market dynamics,” said Hunter Beebe, a managing principal at healthcare real estate advisory firm Healthcare Real Estate Capital. “There is a lot of capital pursuing healthcare real estate beyond foreign—private equity, REITs, domestic—the list goes on.”

Care Transformation Spurring Demand

A sweeping transformation is taking place in terms of where healthcare is being delivered. Vast hospital footprints are giving way to more convenient outpatient space, as consumers and payers seek affordable and accessible care.

The number of outpatient facilities jumped from 26,900 to 40,600 between 2005 and 2016, according to a recent report from commercial real estate firm CBRE.

Meanwhile, health systems are looking to keep pace with new competitors aiming to draw people from hospitals. Reimbursement pressures and capitated payments are pushing people out of expensive care settings while technology is enabling more complex care in outpatient facilities and the home.

Those factors drove many systems to adopt a change in approach, such as Vanderbilt University Medical Center‘s transformation of about half of a struggling 900,000-square-foot Nashville shopping center into an outpatient hub.

 

 

Revenue has followed these trends, according to data from the American Hospital Association. Hospitals‘ net outpatient revenue was $472 billion in 2017, coming close to equaling inpatient revenue, which totaled nearly $498 billion. This has fueled investment in healthcare real estate domestically and abroad.

“Twenty years ago, healthcare real estate wasn’t carved out as a separate sector,” said Jeff Calk, a partner at law firm Waller Lansden Dortch & Davis. “Demand has increased with the evolution of the industry. Now portfolio managers want to have 8% in healthcare real estate, 12% in general office and 32% in hotels.”

“That makes sense given the outlook of other asset classes and markets,” said John Claybrook, a partner at Waller.

More people are working from home, which is softening the office market. Retail’s upheaval isn’t doing the sector any favors. A slumping oil and gas market as well as geopolitical turmoil involving what is the not-so United Kingdom, the eurozone and the Middle East have caused investors to look elsewhere.

“In comparison, healthcare real estate looks stable and profitable,” Claybrook said.

 

 

Weighted average occupancy for medical office space rose from 90.4% in 2009 to 92.3% in 2017, according to data from real estate firm JLL. Medical office returns offer a 2% premium over the broader office sector and are more than double the 10-year Treasury yield, according to JLL. That will likely continue as the aging population requires more care.

 

Catching The World’s Attention

The trends have stoked interest from foreign buyers, including China and Japan, who will continue to seek operation and care-delivery expertise in a variety of subsectors, according to PricewaterhouseCoopers‘ latest US Health Services Deals Insight report. More global interest is directed toward medical office properties, which could boost a prime seller’s market for healthcare organizations looking to offload their real estate, experts said.

“While institutional investors like pension funds or insurance companies in Asia, Canada and the Middle East have been surveying the medical office sector for some time, that interest has only just recently translated to more deals,” Beebe said.

 

“We have seen a noticeable increase in interest from foreign investors in the U.S. healthcare real estate market,” Beebe said. “Foreign investors have been behind the scenes of medical office deals packaged with major U.S. health systems and real estate investment trusts. They have also invested directly or acquired major equity stakes,”

Most of the interest is stemming from the Asia-Pacific region, at 21%, followed by 16% in Europe, the Middle East and Africa, and the Americas at 15%, according to CBRE’s Global Investor Intentions Survey.

“What healthcare investors like is the stickiness of tenancy,” said Christopher Bodnar, vice chairman of CBRE Healthcare Capital Markets. “In general, foreign investors are looking to diversify and the U.S. is still considered a safe haven, especially when you consider the geopolitical risks in the other parts of the world.”

Trailing 12-month medical office transaction volume decreased to just less than $12 billion in the second quarter of 2018 but didn’t stray far from the 10-year high of $14.2 billion, according to CBRE.

 

Medical office and total healthcare real estate deals

The real estate investment trust Welltower, for example, recently paid $1.25 billion for 55 medical office and outpatient facilities owned by CNL Healthcare Properties. Most of the 3.3 million square feet of Class A post-acute facilities and specialty hospitals across metro areas of 16 states are affiliated with major health systems.

“Now is a great time to be selling medical office buildings,” Calk said.

“Still, there are three major hurdles to foreign investors eying medical office properties and senior housing facilities—size of the assets, use and sale restrictions, and relationships, Bodnar said. “It requires a lot of manpower to acquire the critical mass of facilities needed to move the needle; a 40,000-square-foot medical office just isn’t going to cut it. These deals also require relationships and trust with major stakeholders. We have seen Chinese firms that are looking at real estate ownership as a possible entry point into partnerships with larger specialty practices.”

Copious Capital

Many large players in healthcare are flush with capital, which is driving expansion, mergers and acquisitions

“Shedding real estate can be attractive to providers that need capital and want to offload maintenance duties as they put more resources into patient care. But cash-rich health systems are not selling their real estate by and large,” said Mindy Berman, managing director of capital markets at JLL.

 

Source: CBRE research, 2018 Global Investor Intentions Survey

“Despite the burden of technology, labor and pharmaceutical costs, providers are increasingly self-developing new facilities with good access to capital and low borrowing rates, especially for highly rated and high-performing health systems, Mindy Berman said. “Last year was the first year where there were no meaningful monetizations—it goes back to access to capital,” Berman said, adding that she typically sees about two a year.

“The continued strengthening of credit continues to drive a lot of merger-and-acquisition activity and construction,” CBRE’s Bodnar said.

“Many health systems have exercised their right of first refusal, which gives a potentially interested party the right to buy a property before the seller fields any other offers. This is likely an outcome of the low cost of capital,” HRE Cap’s Beebe said.

 

Hospital construction starts
Despite the momentum around medical office space, the silver tsunami of baby boomers is poised to boost demand for hospitals as well. The push for more micro-hospitalsfeaturing smaller footprints and post-acute facilities, as well as local requirements like seismic upgrades required in California, are driving the current $21.4 billion of new hospital construction, according to JLL. Nearly 38 million square feet of hospital space was under construction in 2018, JLL‘s analysis of Revista data shows. That was up from 25.9 million in 2017, 32.5 million in 2016, 27.5 million in 2015 and 21.4 million in 2014.

“Since the financial crisis, health systems’ access to capital across the spectrum has virtually been unlimited,,” said Jeffrey Sahrbeck, a managing director at healthcare financial advisory firm Ponder & Co. “This will continue to drive M&A and construction activity. Hospitals have been building beds and spending on brick and mortar in advance of baby boomers.”

 

Source: Modern Healthcare

Moving Away From The Mothership: Satellite Healthcare Campuses Embrace Multimillion-Dollar Expansion, Specialized Services

/in , , /by

When Texas Medical Center-headquartered healthcare systems began acquiring land outside of the Inner Loop, most secured more land than they initially built up.

Many of those satellite campuses are now under multimillion-dollar expansions as they increasingly stand on their own for specialized care rather than as feeder hospitals for the TMC.

Methodist West Campus (Photo Credit: Houston Methodist Houston)

“You cannot innovate from a space perspective in the Medical Center like you can in some of the new hospitals that are located away from the urban core,” Wolff Cos. Executive Vice President Carolyn Wolff Dorros said. “The suburban hospital expansion is transforming these facilities into mini medical centers.”

Swelling Up In The Suburbs

Nearing space capacity at the Texas Medical Center, hospitals turned to Houston’s booming submarkets — Sugar Land, The Woodlands and Katy — for expansion.

 Demand spiked due to the influx in residents, who increasingly prefer healthcare providers and services, from regular checkups to more complex concerns, closer to their home,” Colliers Senior Vice President Coy Davidson said. “There are no longer just feeder campuses for the mothership — the suburban campuses provide top-notch specialized care.”

Most healthcare procedures, excluding services like heart and organ transplants, will be offered at these centers. All of the expansions share one common thread: a desire to offer the same advanced quality service as the flagship hospitals in the Texas Medical Center.

Tracking The Expansion

Houston Methodist System is under construction on two hospital expansions in Sugar Land and The Woodlands. The Sugar Land hospital launched a $60M expansion project to improve its women’s health services in April. The plan includes constructing a three-story, 30,500 SF building and renovating the existing Sweetwater Pavilion. The facility has experienced an increase in patients from communities outside of Fort Bend County, including Waller, Austin, Brazoria, Wharton and Victoria, according to Houston Methodist Sugar Land Hospital CEO Chris Siebenaler.

“Fort Bend continues to be one of the fastest-growing counties in the U.S., which drives the demand for women’s health services,” Siebenaler said.

A rendering of the The University of Texas MD Anderson Cancer Center (Photo Credit: Courtesy of MD Anderson)

The University of Texas MD Anderson Cancer Center is opening a three-story, 208K SF building in The Woodlands. Serving as an extension of MD Anderson in The Woodlands, the outpatient clinic will feature similar treatment and supportive services, plus new diagnostic and screening services.

It is expected to welcome patients in the spring.  What specialized services are being built out is determined by the needs of the area. In Katy, the home of an eight-time state champion high school football team, Memorial Hermann is investing $15M to construct a 50K SF sports and medicine and human performance facility. The project will be on the Memorial Hermann Katy Hospital campus and provide targeted medical care and athletic training for professionals athletes, youth athletes and active adults.

“Another hospital expansion in Katy is providing a cost-saving solution for patients,” Dorros said.

Texas Children’s Hospital West Campus, the first community hospital designed exclusively for children, opened Texas Children’s Urgent Center adjacent to its emergency room in September. Of the 12 clinics for TCH, this is the second to open steps away from one of its hospitals.

“Patients are allowed to come to either facility and be directed to the appropriate facility depending on the severity of the visit,” Dorros said. “Having both options can lower unnecessarily high hospital bills, shorten wait times and increase use of the appropriate healthcare options. That is such a better patient experience, Patients are getting the right care at the right time.”

Learn more about healthcare-related development opportunities at Bisnow’s National Healthcare South event at the InterContinental Houston Medical Center Feb. 27.

 

Source: Bisnow

An Overview Of The Medical Office Market

/in , , /by

The average asking rent for medical offices reached the highest level on record in the second quarter of 2018, rising 1.4 percent year-over-year to $22.90 per sq. ft., according to a late December report from CBRE.

The firm pointed to tight market conditions and the completion of new, high-quality space as reasons for the continued rent increases.

“Rents increased in two-thirds of the markets tracked by CBRE and grew fastest in some of the markets with the lowest vacancy rates, including Nashville, Manhattan, Louisville, Seattle, and Indianapolis,” Andrea Cross, Americas head of office research, CBRE, said in a statement.

Another factor is that health systems are increasingly using lower-cost outpatient centers. These facilities enable health systems to provide services closer to where patients live. According to CBRE, the total number of outpatient centers grew by more than 50 percent to approximately 41,000 from 2005 to 2016. In addition, outpatient center employment has more than doubled since 2003, and grew 3.5 percent year-over-year in October 2018, compared with 2 percent annual growth in overall healthcare employment.

“Healthcare systems are increasingly catering to patients as consumers—rather than simply users—of healthcare services,” Mark Lamp, executive managing director, healthcare, CBRE, said in a statement. “They are creating outpatient facilities that provide a more ‘hotel-like’ experience—and at a lower cost than the more expensive hospital services—with technology-enabled check-in, abundant natural light and incorporated outdoor spaces, and patient care concierges trained to support guests with any needs.”

On the development front, CBRE‘s report concluded that medical office development strongly correlates with population growth, with Phoenix, Houston, Dallas/Ft. Worth and Atlanta among the top markets for total completions from the third quarter of 2017 to the second quarter of 2018, along with Minneapolis/St. Paul, a leading healthcare cluster. Houston, Minneapolis/St. Paul, Atlanta, Chicago, the Inland Empire, Kansas City and Boston rank among the top markets for square footage under construction.

Click here to view NREI’s ‘An Overview Of The Medical Office Market Slideshow’. This gallery takes a look at the fundamentals in the top 30 markets ranked by vacancy rates as of the second quarter of 2018, but also includes stats on net absorption, asking rents and the amount of space under construction in each market.

 

Source: NREI