Creative Capital, Partnerships Loom Large in Healthcare Real Estate, Says InterFace Panel

Healthcare real estate investment is at a pivotal point of this current cycle.

On one hand, the investment sales market is expected to rebound heartily following a few subdued quarters. According to data from Maryland-based research firm Revista, investment sales volume for medical office buildings (MOBs) was $2.1 billion in third-quarter 2024, in line with the first two quarters of the year but down from more robust quarters in 2021 and 2022.

On the other hand, funding this expected uptick in acquisitions will be more layered than ever before, even with the recent cuts to the federal funds rate by the Federal Reserve.

“The competition level is increasing as deals come to market, but what’s more notable is the capital stack behind those bids,” said Ben Appel, executive managing director of Newmark’s healthcare capital markets team based out of the company’s Philadelphia office. “Today those bids have two to three different sleeves of capital behind them. We are seeing some of those household names come to the table with one or a couple different partners that can do that deal today. It speaks to the increased depth of the market.”

Appel’s comments came during the state-of-the-market panel at InterFace Healthcare Southeast, a two-day regional conference held Nov. 18-19 at the Hilton Nashville Downtown. Andy Dow, shareholder, board member and chair of the real estate industry group of Dallas-based Winstead PC, moderated the discussion.

The panelists spoke at length about the increase in institutional-level capital partners in the healthcare real estate space. The speaker with the most noteworthy case study for this trend was Ryan Crowley, executive vice president and chief investment officer at Healthcare Realty Trust. The Nashville-based healthcare REIT recently partnered with New York City-based KKR on a strategic joint venture partnership.

“We recapitalized two tranches of assets with KKR,” explained Crowley. “We are going to do a third tranche of recapitalizations with them, and hopefully in 2025 we are going to use that vehicle to pivot back toward growth.”

Under terms of the joint venture, KKR is contributing 80 percent of the portfolio value in equity and Healthcare Realty will retain a 20 percent stake in the ownership of the portfolio, as well as oversee day-to-day operations and leasing at the property level. Healthcare Realty seeded the joint venture with 12 properties at a value of $382.5 million, followed by a second investment of properties valued at $118 million.

Crowley said that the REIT is effectively recapitalizing the properties at an attractive cap rate while maintaining ownership and reinvesting the proceeds back into the company by way of purchasing its own stock.

“You have to get creative when times are like this, and so for us to be able to have an option outside of our own balance sheet to grow the company — that’s a big success for us,” said Crowley.

David Braunstein, senior vice president of investments at White Plains, N.Y.-based Rethink Healthcare Real Estate, said that whether it’s joint venture equity partnerships, refinancing or selling, 2025 represents a “capitulation point” where healthcare real estate brokerages will be working overtime, as more deals are expected to come to market.

“It’s time,” said Braunstein. “You are not kicking the can down the road for a better day. Unfortunately, there is no better day if your internal rate of return right now is zero or -1. It’s time to transact.”

No Appetite For Leasing Risk

All the panelists agreed that the value-add play where investors — and more importantly, their capital partners — take on lease-up risk in the short term to realize long-term returns is not a viable strategy in the healthcare real estate space, at least not for 2025.

“The value-add deals are where the capital markets side has issues, but that is on the equity side as well,” said Cole Reethof, vice president of CBRE’s U.S. Healthcare Capital Markets team in Atlanta. “The lease-up play has to be really strong for debt and equity for there to be buy-in.”

“If you have equity that wants traditional value-add or opportunity-oriented returns, it’s a tough opportunity set right now,” added Braunstein.

The leasing profile has to be satisfied even for new ground-up construction, according to the panelists. For the most part, both debt providers and joint venture partnerships are not willing to fund construction projects, even in desirable submarkets, unless tenants are committed.

“Development has been challenging in terms of construction financing,” said Braunstein. “If you have a 100 percent preleased project, you can get off the ground.”

In A Word

To close out the panel discussion, Dow asked each panelist to provide a one-word prediction for healthcare real estate activity for 2025. Randi Ruble, senior vice president of real estate development at Pensacola, Fla.-based Catalyst Healthcare Real Estate, went with the term “customization.”

“We are customizing every single project with the right partners,” said Ruble. “Right now, we have end users that are in our pipeline so we’re customizing how we want that to roll out.  And sometimes our equity partners are from different solutions. We are utilizing every option and being very creative with how we craft our solutions.”

Ruble said that Catalyst has mitigated some of the headwinds facing the industry with its build-to-suit partnerships, which take lease-up risk out of the equation. The firm recently delivered a MOB and ambulatory surgery center in Wildwood, Fla., for Ocala Eye, an optometrist practice with multiple locations throughout north-central Florida.

Ruble’s chosen word was in line with the other themes of the panel, namely collaboration and creativity. The other panelists opted for terms that were optimistic in nature: Crowley chose the word “better,” Appel’s word was “strategy” and Braunstein went with “momentum.” Reethof, meanwhile, chose “soiree.”

“I don’t mean 2025 is going to be an absolute party, but I think everyone that has been on the sidelines is going to join in,” said Reethof. “Groups that have had their dry powder or allocations have shifted and will be joining the party in 2025.”

Source: REBusiness Online