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Healthcare Real Estate Gains Steam As Possible Downturn Nears

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Professionals involved in owning, developing, leasing or financing medical office buildings (MOBs) often point to the Great Recession as an instigator for new investors to become interested in the property type.

To be sure, the healthcare real estate (HRE) space and MOB development and investment certainly suffered during the big downturn of 2007-09. However, thanks to other, unrelated circumstances, existing properties performed well, retaining their physician and health system tenants and, as a result, maintaining their values.

With many economic and business pundits predicting that the country’s economy is once again heading toward a  downturn – albeit not as severe as the last one – the recession-resistant qualities of MOBs are once again piquing the interest of a wide range of would-be investors as well as providing a sense of comfort for those already involved.

A panel of well-known, experienced HRE professionals recently explored this topic, as well as a host of others, while discussing the short- and long-term outlook for the sector during a panel session at the recent InterFace Healthcare Real Estate Conference in Dallas. The panel, titled “What is the Short- and Long-Term Outlook for Healthcare Real Estate?” was moderated by Murray W. Wolf, publisher of Healthcare Real Estate Insights.

The panelists comprised: Lee Asher, vice chairman of the U.S. Healthcare Capital Markets team with CBRE Group Inc.; John Pollock, CEO of San Ramon, Calif.-based Meridian; Gordon Soderlund, executive VP, strategic relationships with Charlotte, N.C.-based Flagship Healthcare Properties; Jonathan L. “John” Winer, senior managing director and chief investment officer with White Plains, N.Y.-based Seavest Healthcare Properties; and Erik Tellefson, managing director with Capital One Healthcare Financial Services.

As the session kicked off the conference on Sept. 17, one of the panelists, Mr. Winer of Seavest, said that during “recessions, healthcare facilities, in particular those with the characteristics that we all know about, do just fine.” But he added that if there is a caveat to that perspective. If a recession is indeed eminent, he cautioned, investors should make sure not to acquire assets with only short-term prospects for success, be they aging buildings and/or those that will not provide flexibility as the healthcare delivery model changes in the future.

“The assets most of us are going to be looking for are newer assets that we’re very comfortable with as a long-term hold; we’re not looking for short-term turnaround plays,” Mr. Winer said. “But otherwise, I think we’re in good shape and I think businesses (in this sector) are in good shape, whether a downturn occurs or not.”

Other Panelists Agreed

“We operate a private REIT (real estate investment trust),” said Mr. Soderlund of Flagship, “and so we have a very long-term view of holding assets, and we are becoming more aggressive, reasonably aggressive in pursuing acquisitions. We want to build our portfolio and we … figure out what we should (hold on to and) not hold on to. We’ve been through that process. There’s a continuing imbalance of supply and demand, and until that changes, and until interest rates maybe go in a different direction, we’re all in a relatively safe place right now.”

Mr. Pollock of Meridian, which often redevelops value-add medical facilities, noted that during a recent meeting with investors from various sectors of commercial real estate, he was “peppered” with questions about HRE.

When he told that group that the tenant retention rate in medical facilities is often in the 85 percent to 90 percent range, “they were like, ‘You’re kidding!’” Mr. Pollock said.

“In general office, it’s 70 percent across the board,” Pollack said. “I think what we’re all seeing is that investors who are in industrial, multifamily and office are now asking more about healthcare. So we’re seeing pension funds that haven’t been in the sector, institutional investors who haven’t been allocating to the space with the theme being that medical office assets are performing better and they’re readying, maybe not for an economic downtown, but toward diversifying their investor base,”

 

Source: HREI

Healthcare Real Estate Investors Choose to Diversify in Face of Fever-Pitch Property Demand

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It’s a highly competitive environment when it comes to healthcare real estate out West, so say InterFace Conference Group’s Healthcare Real Estate West panelists.

One of the central themes of the day-long conference, which was held March 6 at the Omni Los Angeles and attracted 219 attendees, was the pent-up property demand from investors. However, most panelists agree the opportunities are somewhat limited due to a lack of new product and the long-term holding pattern many healthcare investors have adopted.

“You have all this demand, yet transaction volume is staying flat,” said Darryl Freling, managing principal at MedProperties Realty Advisors and moderator of the 2019 Outlook panel. “Where’s the bottleneck? So much is held by healthcare systems and they’re not letting go because clearly there’s just so much demand.”

Shane Seitz, fellow panelist and senior vice president at CBRE, doesn’t see this level of trading picking up, at least not with the current healthcare supply.

“REITs don’t get incentivized to turn over their product,” Seitz noted. “They buy and hold. They treat it just like the nonprofit health system does. They want to have it forever. We also have foreign and domestic groups coming in. They historically invest in funds, but now they’re saying, ‘You know what, I’m going to buy strategically in this space.’”

Seitz further noted that the level of capital in the healthcare real estate sector was around $6 billion in 2008. It’s now $12 billion.

“It’s that instant capital coming in,” Seitz explained. “Everyone has read the headlines about healthcare and they want to buy.”

This frustration has caused many healthcare players to pivot. After all, what happens when one investment vehicle dries up? You look elsewhere. That’s led to diversification.

“Healthcare real estate has really changed a lot over the past 20 years,” said fellow panelist P.J. Camp, principal and co-founder of H2C. “It used to be it was just medical office buildings of 40,000 to 60,000 square feet, two to three stories, on a health campus. This is not at all the case now. With all the capital flooded into our space, it’s driven the product type to be much more diverse.”

Healthcare real estate, for many, now includes not just hospitals and standard medical office buildings (MOBs), but skilled nursing facilities, satellite buildings, home health services, wellness centers, walk-in clinics, seniors housing, micro hospitals and rehabilitation and long-term care centers.

“I never would have thought of seniors housing and long-term care as the world we play in,” Camp continued. “I don’t know when that changed, but seniors and medical buyers have come together. MOB means so many different things now. It’s confusing the market a little bit. We used to know what an MOB was. Now we have to think of all these different products and uses in terms of long-term viability. It’s a very complicated market today. It used to be so simple.”

Community-Driven

One of the largest motivations for the diversification in uses is the community-driven, patient-facing approach many are taking to healthcare nowadays. Deeni Taylor, fellow panelist and executive vice president and CEO of Physicians Realty Trust, believed this is where the focus should have been all along, meaning this “pivot” is essentially a return to Healthcare 101.

“The successful operation of all these products is dependent on the goal of the healthcare organization,” Taylor said. “If it’s for the patient, the probability of success is much higher. If it’s simply a reimbursement scheme, that real estate play is a disaster. It’s just a matter of time. That’s just not a risk we’re willing to take as a public company.”

Karen Costello, senior program manager at Hoag Hospital and participant on the Hospitals & Systems panel, believes organizations will need to embrace the patient and their care as the industry faces two major hurdles.

“We need to be flexible and develop new places to engage with consumers and we have to create stickiness with them because we have to deal with two tidal waves: the aging demographic and tech distraction,” Costello said. “They’re both coming. The question is what’s going to hit first and will the two clash?”

Panelists note that this creates an interesting conflict, as seniors prefer a more personal approach to healthcare, while the younger generation appreciates technology that prevents them from having to physically visit a doctor’s office.

Convenience-Driven

Unless an organization is in a specific niche, such as seniors housing or wellness and preventative care, companies must accommodate both populations and preferences. One of the easiest ways to do this is through micro hospitals, walk-in clinics and ancillary service providers, such as home healthcare agencies.

“We have a disruption issue,” said Jeff West, Hospitals and Systems panelist and executive director of Irvine, Calif.-based Providence St. Joseph Hospital. “The disruption from within is incremental. The continuum of care keeps marching on. What we really need to get to is healthy populations. That’s keeping people out of the hospital. That now involves delivering doctors and nurses to patients’ homes. That’s a very viable, cost-effective model.”

West also says that outside disruptors, chiefly Amazon, are advancing and revolving their model around artificial intelligence. The e-commerce giant recently joined forces with Berkshire Hathaway and JPMorgan Chase on a healthcare company called Haven. The joint venture’s focus is threefold: better access to health providers, easy-to-understand insurance benefits and affordable prescription drugs. Haven will only be available to employees of the three firms, at least for now. The joint venture has stated it eventually plants to share its findings with others outside its network.

Costello sees this play as one the current healthcare industry will need to respond to — and quickly.

“We need to start looking at healthcare as a lifestyle brand,” Costello said. “All healthcare needs to start reflecting wellness. We need to create ‘easy’ so we can be around when people like Amazon come to market. Healthcare has to be somewhere where people want to be. We’re marching down this brand of consumerism, and consumers want to be in Newport Coast. They want to be at the Irvine Spectrum Center.”

John Wadsworth, senior vice president of Colliers and a Leasing & Operations Update panelist, believes partnerships and one-stop shops are where the industry is headed. In fact, he believed retail and healthcare have more in common than many may think.

“Healthcare is retail,” Wadsworth said. “Retail conversions are a real opportunity. How many mall operators have reached out and said, ‘Help us. Be our savior’? It can work. The fundamentals of those spaces can work. They’re not an end-all, be-all solution, but they’re here to stay.”

Pacific Medical Buildings (PMB) is one firm capitalizing on this opportunity. The firm is converting the 50,000-square-foot, 1980s-era Harkins Theatre in Goodyear, Ariz., into a build-to-suit medical office building.

“Converting the movie theater drove down costs and gave us speed to market,” said Jake Dinnen, senior vice president of development for PMB and a Trends & Market Forces panelist. “It was 98 percent leased from day one.”

Connection-Driven

Another retailer has caught Costello’s eye as she calculates the “stickiness” formula for consumers: CVS/pharmacy.

“We use CVS as a benchmark,” Costello said. “With MinuteClinic, they’ve got easy down. They’re convenient, they’re connected. They don’t have specialist physicians. Health systems need to play in that space if they’re going to do prevention health. CVS has established a stronghold there. We need to watch them carefully and meet and exceed them in the way they’re embracing the consumer.”

The lack of specialist physicians means CVS can only have so long of a reach. It also reinforces the notion that partnerships will maximize everyone’s value.

“We really need to know where CVS starts and stops, and where we then start,” said Jeff Land, senior vice president of corporate real estate for Dignity Health and fellow Hospitals & Systems panelist. “When you work in population health, it really becomes about who you partner with because you don’t have to be an expert in everything.”

Whether it was CVS, Walmart, Amazon or each other, panelists agreed competition was out there. Neil Carolan, senior vice president of Rendina Cos. and a Trends & Market Forces panelist believes in mutually beneficial partnerships, noting that 80 percent of his firm’s business is repeat business. One relationship he’s focusing on currently is with retail landlords,

Carolan adheres to the old saying, “if you can’t beat hem, join them” — or at least move in alongside them. “Will people go to a doctort next to Macy’s?” Carolan asked. “Probably. They like to put pediatricians near grocery stores. Mall redevelopment is going to be a big trend. We’re doing several of them. The pipeline is long. Competition doesn’t scare me. I don’t think it scares anyone. Bring it on.”

 

Source: REBusiness Online

Case For Investing In Healthcare Real Estate Remains Strong: Panel Discusses Pros And Cons Of Sector

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As brick and mortar retail stores flounder and pricing for industrial and multi-family properties continues to soar, many investors in recent years have started to look to “niche” commercial real estate (CRE) sectors to round out their portfolios.

One of the more newly discovered niche property types are medical office buildings (MOBs) and healthcare real estate (HRE) facilities, which aren’t exactly very “niche” anymore.

“It just seems like all investors are talking about these sectors now — student housing, self-storage, life science, medical —  whereas before all the news was about office, retail, multi-family and industrial,” said Elizabeth Thomas, managing director with Boston-based Bain Capital Real Estate, which is a relatively new investor in the HRE sector.

Nicholas Buss, senior director of research for Atlanta-based Invesco Real Estate (NYSE: IVZ), agreed with Ms. Thomas, adding “The firm “broke away from its shell about two years ago and started looking at sectors around the edge as well. We like the secular (non-cyclical) drivers behind medical real estate and the durability of the property type that seems to continue through economic cycles and gives us some diversification in our portfolio.”

“Even though the amount of MOB square footage, at 3 billion square feet, represents only about 5 percent of the overall commercial real estate (CRE) sector, the space is very attractive and has been the focus of many new investors in recent years,” according to Daniel Klein, senior VP of investments and deputy chief investment officer with Milwaukee-based Physicians Realty Trust (NYSE: DOC).

Mr. Klein moderated an HRE investment panel session that included Ms. Thomas and Mr. Buss at the fifth annual Revista Medical Real Estate Investment Forum, which was held Feb. 6-7 in San Diego. The session was titled “The Case for Investing in HRE” and also included as panelists Peter Martin, managing director with San Francisco-based JMP Securities, and Charles Campbell, managing partner and CEO of Charlotte, N.C.-based Flagship Healthcare Properties, which also manages a private real estate investment trust (REIT) that owns MOBs.

The focus of the panel was to hear from investors – both those who have been in the space for years as well as newcomers – as to why HRE is currently so attractive and whether it will be for the long haul. While the focus was mostly on MOBs, the panelists also talked about other HRE facility types, such as senior housing and post-acute care.

“We like the fact that the property type is not a GDP (gross domestic product) dependent property type,” Ms. Thomas noted. “We like the strength of the demographics that will depend on senior housing, and we like the fact that clinical care is migrating from the hospitals out to where the patients are. In addition, the MOB sector is not fraught with speculative development when we’re looking to invest in other sectors we really have to monitor the amount of spec development taking place.”

“JMP Securities entered the HRE space in a number of different ways, including as an investment bank providing equity growth capital for operators, and then we moved into the REITs, funding apartment REITs before moving over the healthcare REITs,” Mr. Martin told the audience. “We’ve taken a value-add approach on the investment side, as our work on the healthcare side is focused on the dislocation created by different reimbursement changes. In the last five years, we’ve been building things and selling them back to the healthcare systems, who have been slow to realize they need more outposts to service their beneficiaries.”

“The company made a commitment to HRE a decade ago and is all in, with no discussion on whether we should allocate capital to other spaces,” Mr. Campbell of Flagship Healthcare Properties said. “The company started a private REIT in recent years that is largely funded by high net-worth individuals and family offices, including some foreign investors. When we sit down with our investors, they keep coming back to us about the stability, the risk-adjusted yields and the predictability of the sector. A lot of it comes down to our access to deal flow, and in our world there is a premium to having relationships with good operators to work with. Flagship REIT is a longer-term holder of its MOB assets, and we tell our investors we say we like to own for a minimum of five years. Unless you’re a ground-up developer or a value-add buyer, that’s how you benefit from the inherent stability of the product type. And, it’s also a good way to build relationships with the health systems, as they prefer ownership stability as well.”

 

Source: HREI