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What Drives Investors To US Healthcare Real Estate

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US Healthcare real estate continues to buck the work-from-home trend that has stifled growth in office properties in all major economies post-Covid-19.

This is due to a number of factors, including the one-on-one nature of medical care and long-term growth trends in the medical sector in the US, which ensure that rentals and capital values for MOBs stay relatively stable.

The medical office market has consistently seen annual rent increases since 2012. Favourable lease terms support minimal tenant turnover, creating steady rental cash flow, thus benefiting both vacancy and rent trends. According to a report from Colliers, despite the rise in average rentals in MOBs, vacancies have declined to 8%, contrasting with vacancies in the office sector in general, which stand at 15.1% and growing.

Rentals for traditional offices usually rise faster than those for MOBs in upturns but MOB rentals tend to be more resilient during downturns. Since 2000, growth in MOB rentals has averaged 1.8% a year compared with 1.4% average growth for traditional office space.

Advantages Of Healthcare Real Estate Over Other Property Investments

These advantages arise due to several underlying drivers of MOBs.

One is that since the Affordable Care Act was passed in 2010, the number of Americans with health insurance has risen steadily. These trends are expected to continue. In June last year, the Office of the Actuary Centres for Medicare & Medicaid Services forecast that from 2022 to 2031 average growth in national health expenditure at 5.4% would outpace average GDP growth at 4.6% in the same period, resulting in an increase in the health spending share of GDP to 19.6% in 2031 from 18.3% in 2021. By 2031, 90.5% of the US population will have medical insurance (in 2009 it was 85%).

Another driver is the ageing US population. The number of people aged 65 and older in the US has risen by about 3% a year over the past decade, and older people are generally more likely to use medical services such as routine check-ups, dental cleaning and visiting specialists – which are increasingly happening in medical offices rather than hospitals.

Healthcare real estate is different from most other types of office building in that healthcare tenants are readier to sign long-term leases because they build up a reputation with patients in their vicinity and often require significant set up costs especially in the case of imaging, laboratories, theatres, oncology and even dentistry. For investors in these buildings, long leases provide predictable cash flow, lower tenant turnover (and associated sign-on costs) and lower vacancy rates.

Longer-Term Outlook For Healthcare Real Estate

While demand for healthcare real estate is growing, supply is restricted as banks are pulling back lending in an environment of high interest rates and construction costs, which deters new developments. In this environment, opportunities also arise to buy distressed assets at attractive entry points that will deliver superior returns over the long term.

According to a survey of 37 institutional healthcare investors by US-based management consultants KaufmanHall, which was published end-September 2023, almost 90% of survey respondents reported that occupancy rates had improved or stayed the same over the preceding 12 months. 86% of respondents expected their MOB portfolios would perform similarly or better in 2024, and almost the same proportion expected annual rentals to rise by 3% or more for new or renewed MOB leases.

Although the majority of respondents said tenant improvement packages were having to become more aggressive to persuade new tenants to sign or existing tenants to renew, only 16% said they had had to offer inducements such as a rental-free period. KaufmanHall suggested demands for better sign-on deals probably reflected rising costs due to inflation rather than more fundamental shifts.

“In short, the survey results indicate a market with significant fundamental strength despite capital market challenges. Cap rates are up, meaning valuations are down, and transaction volumes are also down. Past experience suggests that this dynamic may offer a significant opportunity to buy high performing assets at attractive historic relative valuations,” KaufmanHall said.

Conclusion

Steep increases in inflation and interest rates over the past couple of years have demonstrated that property is not always a safe haven. Investors in over-geared properties, or those where lease agreements provide no protection against rising tenant costs, are feeling the strain. There are an increasing number of distressed sales in the general office market. This is an environment where investors should pick their sector very carefully. Well-maintained and well-tenanted healthcare buildings in good locations, managed by an experienced team, stand out in this market.

 

Source: BizNews

Where The Best Deals Are In Healthcare?

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Changes in interest rates and cap rates continue to exert influence on healthcare property values, and Daniel Anderson, investment sales broker in Northmarq’s Nashville office, said he’s seeing falling transaction volume and plenty of all-cash buyers.

Anderson said the healthcare real estate sector continues to be both resilient and attractive. He singles out urgent care facilities and dental properties as good buys.

All-cash buyers are leveraging reduced prices and favorable rates. And with reduced competition, this investor group is becoming more active, he said.

“There has been a decrease in sales volume across all investor categories, especially as of late,” according to Northmarq. “But despite REITs and institutional investors temporarily reducing their acquisition activities, private buyers – including those all-cash buyers I mentioned before – have really emerged as influential players in the market.

He said what makes the healthcare real estate sector attractive is high acuity, resilience against economic downturns, and indispensable importance.

“Despite the recent uptick in interest rates, we continue to see low cap rates, although they are trending upward, net lease investors across nearly all categories remain active in the market,” Anderson said. “Regarding medical offices, those greatly depend on foot traffic and synergies for sales volume, and often cost twice as much as traditional office space to build. Therefore, we see healthcare tenants become heavily reliant on the stickiness of the location and buildout of the building.”

With cap rates, he said dental properties “currently shine” with a noteworthy four-basis-point compression year-over-year, while dialysis properties saw a significant spike in cap rate expansion of 135 basis points year-over-year.

Anderson’s advice to investors is to consider the pivotal role of diversification in healthcare real estate investments.

“Meticulously evaluate factors such as tenant creditworthiness, lease durations, and geographical diversity when constructing their portfolios or evaluating new acquisitions,” Anderson said.

For 2024, Anderson said he hopes to see the buyer-seller gap in pricing expectations converge in mid-2024, which could lead to an increase in transaction volume next year and beyond.

 

Source: GlobeSt.

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Another MOB Sales Record: $25 Billion In 2022

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Perhaps James A. Schmid III, chief investment officer and managing partner with Media, Pa.-based Anchor Health Properties, summed up how many successful healthcare real estate (HRE) investment and development firms are going about their business at a time when costs and interest rates are on the rise.

“Last year, 2022 was certainly a pivot point, I think, both for our sector as well as commercial real estate and the economy as a whole,” Mr. Schmid said. “It was, in aggregate, a very successful year for us as we closed just over $600 million of new acquisitions, monetized and or recapitalized several hundred million of developed and/or owned assets … and monetized a strategic position in our operating business with a client of Stepstone Real Estate, an international offshore client.

“That being said,” he added, “as the market has continued to move, with interest rates continuing to rise as the (U.S. Federal Reserve Bank) increases rates, we’ve continued to be more and more selective about decisions we make, particularly with new investments – trying to be thoughtful about what where we want to own and why, trying to focus on our areas of strength and scale across our platform.

“This is also true on the development front, where we continue to be extremely active. We really haven’t seen much of a slowdown in development; if anything, we’ve seen a continued acceleration in development in different parts of the country, particularly high growth markets where health systems and physician clients alike have a continued need for more and more specific space for clinical use.”

Mr. Schmid was a guest speaker during a fourth quarter (Q4) subscriber webcast hosted Jan. 24 by Arnold, Md.-based Revista, a data firm that provides a wide variety of statistics on the HRE sector to its subscribers.

The $2.2 billion of MOB sales in Q4 will likely, when all of the transactions are recorded, rise about 30 percent, to about $3 billion, according to Revista. (Slide courtesy of Revista)

The webcast led by Revista principals Mike Hargrave and Hilda Martin focused heavily on medical office building (MOB) market data during this time of inflation and rising debt costs, with much of that data reaffirming what a strong industry the HRE sector continues to be.

 

Source: HREI