Healthcare real estate developer PMB think their new 445,000-square-foot Wellness Village will transform healthcare by integrating behavioral health treatment with medical care and social services. The public-private partnership project, which is expected to be complete in 2026, is part of a growing direction in healthcare CRE investment and development.
With funding support from the federal government and the growing need for mental health facilities nationwide, this niche commercial real estate sector is evolving and emerging as a viable investment opportunity, including drawing the attention of REITs.
The Substance Abuse and Mental Health Services Administration noted in a 2021 survey that nearly 1 in 4 adults 18 and older, and 1 in 3 among adults aged 18 to 25, had a mental illness in the past year.
“The fastest growing sector in this asset class has primarily been the substance use disorder treatment facilities,” writes Justin Butler, leader of the Healthcare Valuation Practice Group for Colliers.
Most facilities that treat substance abuse disorder are not purpose-built, according to Butler, and many are adaptive reuses of nursing homes, assisted living facilities, hospitals, schools, large homes, and sometimes even apartments and office buildings.
“The behavioral health industry is currently riding a hot wave in terms of funding from the federal government,” Doug King, Vice President and Healthcare Sector Lead at Project Management Advisors, tells GlobeSt.com. “While this could always turn around if the political winds shift, it’s great to see so many behavioral health and addiction centers opening in communities across the country right now.”
Unlike other medical facilities, which often require specialized technology and higher power needs, behavioral health clinics have about the same requirements as the average office, albeit with the addition of specialized anti-ligature devices and additional surveillance for patients of higher acuity, according to King.
“When looking to lease space for behavioral health centers, the ideal clinic should be located in a centralized place that’s easy to get to on public transportation,” King said. “Especially for behavioral health clinics that focus on addiction, it’s important to find a property with space for socialization, which can be essential for recovery. That’s why we see a lot of behavioral health clinics feature outdoor areas (as many patients are smokers), cafes, and even diners where patients can mingle with each other before and after treatment.They also need to be designed with mental health in mind — lots of natural light, comfortable seating and biophilia, and an array of private areas to accommodate different kinds of patients.”
When it comes to adaptive reuse, one area of opportunity for the CRE industry is the conversion of former retail properties in strip malls and downtown areas into behavioral health centers, King said.
“Not only are these spaces already sufficiently embedded into the community, but they also have enough space for clinics to expand and partner with other community organizations, such as medical nonprofits and housing programs,” said King.
Avison Young’s Brooks Hauf tells GlobeSt.com he has seen an increase in the demand for behavioral health services nationwide.
“The largest challenge for the sector is staffing related as the supply for talent is more specialized and not as deep as other labor sectors,” Hauf said. “With demand for behavioral health services expected to continue, staffing will remain very competitive and will drive decision-making on specific locations that have deeper talent pools.”
Butler said the costs for purpose-built facilities compared to adaptive reuse are considerable, and the increased cost often doesn’t provide comparable increased utility. However, there have been purpose-built facilities in operation.
Sale leaseback transactions generally see year-one yields in the 8% to 10% range, Butler said, but this can vary above and below that based on rent levels, tenant strength, quality of the real estate, and location. Rents are commonly in the $30 to $40 PSF NNN range, and many operators can afford rent at these levels, according to Butler.
“We would expect to see more purpose-built facilities, as well as larger operators with national networks and in-network insurance relationships,” Butler said. “There already have been some publicly traded healthcare and net lease REITs that have been purchased these facilities, “and we would expect that to continue.”
Source: GlobeSt.
Increasing interest from institutional investors has helped to push the medical office sector to hefty transaction volumes and steady occupancy despite record construction in the second quarter.
A new report from CBRE notes that US transaction volumes this year for medical office properties are 50% higher than their pre-recession levels. Meanwhile, medical-office capitalization rates – a measure of a property’s income as a percentage of its price – have pulled even with those of conventional offices after years of registering higher.
Much of the market’s momentum comes from demographic trends toward longer lifespans and more healthcare consumption as well as a medical-industry shift toward more outpatient care. CBRE defines medical offices as office buildings in which at least half of leasable space is occupied by medical uses such as dental, surgical or special practitioners and services.
GlobeSt.com caught up with Ian Anderson, CBRE’s head of Americas Office Research, for an exclusive interview about the report’s findings on the medical office sector. Here are excerpts from that conversation.
GlobeSt.com: What about the medical office sector is most appealing to institutional investors and why are they jumping into the sector now rather than years earlier?
Ian Anderson: Medical office buildings have been an attractive target for institutional investors for many years, but this current cycle has been unique in accelerating that trend. The current expansion has seen a dramatic transformation in the way commercial real estate is being used, and that sometimes has negatively affected demand for space. That’s particular true for conventional offices, for which demand is influenced by workplace strategies and densification, and for retail space, which is adapting to e-commerce. As a result, many institutional investors have been forced to seek new opportunities that offer attractive returns. This has caused a surge of interest into alternative commercial real estate investments where growth is more robust, such as life sciences lab space, self-storage, and co-living, among others.
Aside from the ‘push’ by investors into emerging, alternative commercial real estate investments, the ‘pull’ of deeply entrenched and highly attractive demand drivers is what is really driving demand for medical office space. Any investor seeking to capitalize on the demographic and consumption trends unfolding in the United States wants to have a position in medical offices. Underlying these megatrends, though, is the continued shift by healthcare systems to provide services in a lower cost setting that is more convenient to the consumer. In other words, allowing consumers to obtain healthcare services near to their home, rather than venturing to the main hospital of a healthcare system. Finally, though, medical office investment is driven by the income derived from these properties, which are frequently supported by a variety of tenants with abundant demand and a reluctance to move upon the expiration of their lease.
GlobeSt.com: What has fueled demand for medical office space in markets where it is strongest, namely Chicago, Atlanta, New Jersey and Nashville?
Ian Anerson: Demand for medical office space varies from market to market due to several reasons. In some instances, we observe higher net absorption – demand – simply as a result of the delivery of new medical office buildings in markets where it is easier to build. For example, there are more medical offices under construction and waiting to be occupied in the Inland Empire than Los Angeles, where it is more difficult to build. In other instances, there are local trends in the healthcare industry, such as a merger between healthcare systems, that may affect demand for space. But generally speaking, higher demand for medical office space by market results from a combination of favorable demographics, either in the form of a growing total population or an existing, abundant elderly population, supported by attractive and growing incomes.
GlobeSt.com: Given the strong trends driving the sector, why aren’t we seeing more construction of medical office buildings? Does the pipeline include more deliveries on par with the record set in this year’s second quarter?
Ian Anderson: Like most types of commercial real estate today, construction of medical offices has remained in check with demand. Not surprisingly, the vacancy rate of US medical offices hasn’t budged by more than 20 basis points in the last two years. In the second half of 2018, we saw construction volume of medical offices drop significantly, which should help boost rent growth for investors in the near-term. Then construction activity picked up in 2019 to levels consistent with the average since 2010, but still well-below the peak of construction in 2016.
Source: GlobeSt
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