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Health-Care Real Estate Deals Hit Record $26 Billion

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Health-care real estate continues to thrive, and investors can’t get enough of the sector, according to JLL’s Valuation Advisory Group’s inaugural Healthcare Investor Survey and Trends Outlook.

Transactions in the sector climbed to $26 billion in 2022, marking an annual record.

In the first report of its kind for JLL, the commercial real estate services firm queried approximately 130 influential leaders in the health-care industry. Participants included private capital providers, which accounted for the highest representation at 33 percent, followed by developers and institutional investment managers, which comprised a respective 23 percent and 19 percent of respondents. The group helped provide a crystal-clear picture of health-care real estate’s success in 2022 and its prospects in 2023.

According to the JLL report, medical office buildings proved a powerful magnet for investors in 2022, with the property type accounting for 58 percent of overall health-care investment activity. Part of the high volume of trading in the sub-sector can be attributed to the $9.4 billion merger between Healthcare Realty Trust and Healthcare Trust of America, which involved a portfolio of approximately 400 MOBs. Had the joining of the two companies not occurred, the numbers would likely look a bit different, as transaction activity declined significantly in the fourth quarter of 2022 due to pricing uncertainty amid rising interest rates and recession fears.

Ambulatory surgical centers followed MOBs in popularity among investors in 2022. Trades involving the property type went on the upswing, jumping 7 percent year-over-year to 27 percent of the total health-care transactions. The investment community’s keen interest in MOBs and ASCs can be linked to an ongoing transformation that has buoyed demand in the outpatient care arena.

“Advances in technology, changes in reimbursement and consumer preference and convenience have shifted sites of care from inpatient to outpatient,” according to the JLL report.

Fundamentally Sound

The rising demand for MOBs along with a low level of new deliveries are serving as a foundation for strong fundamentals in the sector. At the close of 2022, MOBs recorded an occupancy level of 92.3 percent and continued to experience consistent rent growth. MOBs are outperforming the traditional office sector, where the average occupancy level is a notable 11.4 percent lower.

Unlike traditional office buildings, MOBs are not contending with the leasing challenges that accompany the spread of the remote-work trend. And the very nature of MOB space lends itself to longer tenant commitments.

“Because of the high cost to build out a medical office space and proximity to patients, medical office tenants tend to remain in the same space for longer, providing stable occupancy,” as noted in the JLL report.

No Hindrance To Sunny Forecast

Although MOBs are the star of health-care real estate in investors’ eyes, the sector is not impervious to challenges. JLL queried survey respondents regarding their apprehensions about potential obstacles in the health-care investment sector over the next 12 months, and 66 percent pointed to rising interest rates and capital markets as the leading concern. Development costs, garnering the concern of 13 percent of respondents, ranked as the second-most worrisome issue.

Although the investment community is operating with the knowledge that looming obstacles could impact their activity, 66 percent of survey respondents reported that MOBs will remain the most desirable opportunity in health-care real estate in 2023. The immense appeal of MOBs among investors is here to stay for the long term, even amid economic uncertainties.

As noted in the JLL report, “Strong net operating income growth at 2.7 percent in the fourth quarter of 2022, despite high expenses and acceptance of 3 percent escalations, make MOBs a resilient asset class in a cloudy economic climate.”

The future looks bright for health-care real estate investment overall. Thirty percent of survey participants indicated that they anticipate an increase in transaction activity and market valuations over the next 12 months.

 

Source: CPE

MOBs’ Transaction Volume Slows In Q2 2022 But It’s Hardly a Hindrance

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A slight slip in medical office transactions in Q2 2022 compared to Q2 2021 levels is not indicative of the continued interest and investment in medical office real estate.

In 2022, according to Q2 Medical Office Market Update from Brown Gibbons Lang & Company (BGL), medical office buildings and ambulatory surgical centers will continue to emerge as the “most attractive assets” within the industry.

“Demand for outpatient clinics continues to increase due to advancements in medical technologies, patient preferences, and financial incentives,” according to BGL’s report. “In search of a stable investment option, we predict more institutional and retail investors will direct capital toward the medical office market for the remainder of 2022.”

Christopher Cumella, co-founder, Cypress West Partners, tells GlobeSt.com that capital markets have paused with the uncertainty in the market, particularly in terms of debt.

“As long as that remains uncertain transactions will be slower,” Cumella said. “Especially when coming off records years it will feel even slower. The Fed’s monetary policy is creating a bid-ask spread between buyers and sellers, which might need some time to close that gap.”

A ‘Red-Hot’ Past Decade

Michael Dettling, Principal, Healthcare Real Estate Services, Avison Young, tells GlobeSt.com that the medical office market has been red-hot for both institutional and private investors for the past decade. Investors are drawn to the steady performance of medical offices with low vacancy, strong tenant credit, long lease terms and low tenant turnover resulting in high property valuations.

“Medical office sales slowed a bit in Q2 2022 with the rise in interest rates and following a torrid end of 2021 which likely pulled some sales forward resulting in a weakened first half of 2022,” said Dettling.

Dettling said another factor for the strong sales late in 2021 was the pent-up demand for deployment of capital following the weak COVID-period sales.

“With medical office values remaining high and cap rates compressed, sales will moderate for the next 12 months as investors monitor the economy and rate movement,” Dettling said.

Medical Office ‘Proven’ Resilient

Mitch Creem, Principal at GreenRock, tells GlobeSt.com that investors have always seen medical office buildings as a haven during uncertain financial times, primarily due to their historically proven resiliency during market downturns.

“There are many medical office buildings today still owned by physician groups or syndications looking for capital partners to help finance property upgrades and modernization,” Creem said. “In many cases, physicians are eager to monetize their real estate equity holdings to provide dividends to those groups or provide funds for succession planning and retirements. Similarly, many U.S. hospitals own medical office buildings on or near their campuses, but those assets are in need of major improvements to attract and retain physicians and patients. Partnering with real estate investment trusts and funds to obtain capital for those updates is crucial today given declining hospital profits and cash flows.”

Creem said, additionally, these MOBs will remain desirable investments in light of the continuing growing aged population and a shift of medical care toward lower-cost outpatient settings.

Average Price Per Square Foot Increased

BGL reported that medical office properties accounted for 22.8% of Q2 2022 office transactions—down 3.1% from the same quarter last year.

Year-over-year transaction volume dropped to $2.94 billion from $3.28 billion, a 10.4% decrease. There was a 20% increase in the average price per square foot ($356) from a year ago.

Real Estate Investment Trust (REITs), private equity, and institutional investors continue to raise and deploy sizable capital into the commercial healthcare real estate industry space.

Residents Seek Services ‘Closer to Home’

CommercialEdge’s manager Doug Ressler tells GlobeSt.com, that according to Yardi’s most recent data, more than 16 million square feet of properties that include some types of medical offices are currently under construction.

“Furthermore, as the U.S. population is aging, demand for MOBs is poised to grow in the coming years, especially in suburban centers, where residents will seek services closer to home,” Ressler said. “We are getting more calls from investors in other segments of real estate looking to pivot into medical office due to trends we are seeing in the general office. We are wondering if more competitive bid environments could keep pricing steady,” Thomas Allen, founder and CEO of Practice Real Estate Group, tells GlobeSt.com,

 

Source: GlobeSt.

Where Medical Office Acquisition Opportunities Are

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Healthcare real estate in the US is in a state of absorption and expansion, as networks and organizations battle it out to claim the best practices and locations.

There is flux within the sphere, reported NAI Global last week, with medical REITs among the most active buyers in 2021, looking for product and paying big numbers.

One acquisition opportunity are point-of-access clinics, located within diverse communities. Another increasingly popular acquisition target are independent specialty practices—regardless of size—which are being absorbed by large systems. Meanwhile, other clinics are looking to break away, creating real estate disposition opportunities.

Buyers And Sellers In State of War

Additionally, off-campus, multi-specialty clinics and ambulatory surgical centers are seeking strategic locations for expansion and geographic reach, representing more opportunities. The current and foreseeable climate is one of “war,” according to one commentator to NAI Global, as firms compete for market share and dominance.

Medical office buildings have been incredibly stable throughout the pandemic with occupancy rates remaining unchanged and asking rates increasing. Their stability compared to other classes continues to draw interest from investors who see it as a “safe” investment despite construction costs increasing in 2021.

Finding Historically Low Cap Rates

Fully leased MOBs with credit tenants are expected to continue to trade at historically low cap rates in 2022. Large institutional owners have maintained their rentals, concession packages, and the like, while local landlords with mixed tenant profiles are more willing to offer competitive lease packages and incentives to attract and secure medical tenants.

The sector does face specific challenges though, NAI Global also says. Staffing shortages, including burnout of healthcare workers, will continue in 2022, resulting in pressure to both provide care and remain profitable. Additionally, costs for care will outpace inflation, as the overwhelming demand requires additional expenses.

 

Source: GlobeSt.