Leading Investment Manager Is Doubling Down On The Healthcare Sector

As healthcare spending takes up a larger portion of the U.S. economy each year, savvy RE investors are betting big on healthcare properties.

Since 2019, leading investment manager Nuveen Real Estate has built a healthcare portfolio of more than $2.5 billion in AUM across over 100 properties. With the sector poised for even greater growth due to the increasing popularity of medical outpatient buildings (MOBs) as well as the mounting demand for senior living facilities for aging Baby Boomers, the institutional investor is planning to increase its investment in the sector.

The Real Deal sat down with Chad Phillips, Global Head of Workplace, Retail, Mixed-use and Healthcare at Nuveen Real Estate, for an inside look at why his firm has moved into the healthcare sector in a big way.

The Silver Tsunami

The key trend underlying growth in the healthcare space is demographics. The Baby Boomer generation – the 75+ age cohort – is expected to grow at 3.7% a year for the next 10 years as compared to a 2% growth rate over the last 10 years. That 75+ population is expected to jump from roughly 8% of the population to 12%.

“People have been talking about this silver tsunami with the aging population for a long time and it’s finally here,” says Phillips. “We spend more than other developed nations on healthcare, and we will continue to do so because of the demographic tailwinds.”

The numbers are stark: healthcare spending now accounts for nearly 20% of U.S. GDP, and that percentage is expected to grow as the population ages. To meet the needs of this aging population and capture the market, Nuveen Real Estate has primarily focused on two property categories where they expect the most growth.

“We know the demand is there for both outpatient facilities and senior living,” says Phillips. “We also need new facilities that draw on previous lessons learned and cater to the changing needs of the customer base.”

The Medical Outpatient Building Revolution

Healthcare delivery has undergone a major shift in recent years. Hospital admissions have dropped by 15% in the last decade, while outpatient admissions have increased 10%. As such, the market has focused more on outpatient care and servicing patients away from traditional hospital campuses, and the demand for MOBs, which are generally single-story buildings that are 60,000 square feet or less, has grown.

“Those buildings are all about serving the patient in a convenient location that’s easier and lower cost of care than going to the hospital,” explains Phillips.

From an investment standpoint, MOBs tend to generate steady income with less volatility compared to some other asset classes. Tenants typically occupy space with long-term NNN leases, meaning the expenses are the responsibility of the tenant, and tenants also bear much of the cost of cap-ex improvements. These properties have high renewal rates because medical tenants are reluctant to move.

“When you invest in these properties, they’re very resilient,” says Phillips, who notes that tenants do not want to walk away from the capital they have invested in the space or disrupt their patient base who has supported a particular location.

Another attractive quality of MOBs is that there is little speculative development.

“Developers don’t put shovels in the ground until they’re largely pre-leased,” says Phillips. “That really curbs the amount of new development and keeps unwanted supply out of the equation and fosters a healthier investment environment.”

When it comes to Nuveen’s MOB portfolio, the firm is pursuing both acquisition and development investment opportunities. For example, Nuveen’s U.S. Cities Workplace Strategy recently acquired an eight-building, $200 million MOB national medical outpatient portfolio. The newer vintage assets are located in five growth markets across the Sun Belt and feature high-acuity uses such as ambulatory surgery centers and advanced imaging.

Senior Living In The Post Pandemic Era

On the senior living side, Nuveen Real Estate is focused primarily on building state-of-the-art, modern senior living communities that offer continuum of care across independent living, assisted living and memory care.

“There were a lot of lessons learned during the pandemic,” says Phillips. “Much of the existing senior housing is outdated, and there needs to be new senior care facilities that have nicer & larger single-occupancy rooms equipped with smart technology. Further, there needs to be new development to withstand the aging population that will continue to grow rapidly over the next 10 years.”

These new facilities are aimed squarely at the Baby Boomers, whose needs differ from previous generations. Boomers are wealthier and more demanding, and they expect tech-enabled spaces. Additionally, there are higher standards for items such as air purification systems, larger resident rooms and single occupancy rooms in senior housing.

“We’re going to require new facilities that cater to the changing needs of the customer base,” says Phillips.

One example of Nuveen Real Estate’s investment in the new facilities is the firm’s partnership with Experience Senior Living (ESL) on The Gallery at Ft. Collins, a 144-unit senior living community in Colorado with dedicated units for independent living, assisted living and memory care. The property is an example of the elevated experience that today’s seniors are looking for, with amenities such as a rooftop garden, two-story grand hall, private family dining room, pub, salon and theater.

The Nuveen Real Estate Advantage

“As a national investor with boots on the ground in its 13 offices around the U.S., Nuveen Real Estate has the ability to really uncover the best opportunities nationally,” says Phillips.

The firm has the flexibility to invest through both acquisitions and new development, as well as the flexibility to buy or build and hold, or exit and capitalize on an attractive sale price for an acquisition or development.

Nuveen Real Estate has distinguished itself within the healthcare investment space by building deep relationships with healthcare providers, universities and strategic partners including NexCore and Healthcare Realty.

Click here to view Nuveen’s ‘Case Study: Medical Outpatient Building‘.

Source: The Real Deal