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As 2023 Recession Predictions Mount, Healthcare Real Estate Rises On CRE’s Most-Wanted List

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With whispers about a 2023 recession growing louder in the CRE industry, many players are looking for safe asset classes to invest in and more eyes are making their way to healthcare real estate.

“There’s this growing chorus of economists suggesting that a recession could be a reality in 2023 — some say shallow, some say not so shallow,” Steve Bolen, U.S. head of Healthcare Real Estate at LaSalle Investment Management, told the audience at Bisnow’s New York Healthcare Summit. “That is a time when I think healthcare real estate will really shine.”

The past six months have sent shock waves through the CRE sector, with stubborn inflation, ever-rising construction costs and seven federal interest rate hikes sparing no sector from economic pain. And as investors examine where to allocate their dollars in 2023, many are doubling down in their search for asset classes a little more removed from economic cycles, a dynamic that CRE players at the event, held at 156 William St., said will favor healthcare real estate.

“It was already on LaSalle’s 2022 list of preferred asset classes to invest in,” Bolen said.  “And alongside industrial, multifamily and single-family rentals, remains on 2023’s list for LaSalle’s clients. It has historically been a recession-resistant asset class. We were not surprised at all to see healthcare real estate land again on the favored list for 2023.”

In particular, venture capital and private equity are looking to healthcare real estate as they seek shelter from the instability shaking the broader economy.

“That dynamic is challenging traditional health systems looking to raise capital for their real estate,” Mount Sinai Ventures Managing Director Brent Stackhouse told Bisnow’s audience. “In terms of what I’m seeing here in New York, there’s a big influx of private equity capital coming in to build new healthcare businesses. That is eroding away our base of business’s health systems, and we need to compete with that. Our strategy is to move towards joint ventures with some of those entities.”

Major players in New York City are looking to capitalize on healthcare consumer demand for convenience, targeting real estate investments in areas that their clientele moved to during the pandemic, Stackhouse said.

“One of the things that was really eye-opening for our health system was the tremendous success of CityMD. They put up urgent care centers on seemingly every corner, and in doing so created a new dynamic,” Stackhouse said. “People will get care — and at times, very intimate and sensitive care — with somebody they’ve never met before because it’s convenient. And that convenience outweighed those longstanding relationships between the patient and provider.”

The pandemic’s disruption of the healthcare industry has opened up new opportunities, said Joy Altimore, chief revenue officer at EHE Health. The early pandemic brought a revolution in virtual care, creating new opportunity and space for other types of innovative healthcare businesses.

“What we’re seeing right now, especially in 2022, 2023 — and particularly in the femtech space — we see a huge lead in freezing your eggs or family planning or IVF. These are high-tech experiences that have to happen in a location and cannot happen virtually,” Altimore said. “You have a company like Kindbody, that last year only had eight locations. By the end of next year, it will have almost 100 locations. Where is that going to go?”

Convenience of healthcare is a key theme permeating different aspects of the industry: Large NYC employers, thinking about benefit packages and employee retention, are also looking at ways to build on-site care centers, Altimore said.

“Employers need convenient options for their employees,” Altimore said, adding that hybrid and remote work add to the demand for diversified location selection for employer-based healthcare sites. “Employer populations are not monolithic. You have working moms, working families, you have younger generations coming in, they’re looking for different healthcare options.”

A growing aging population also presents a huge opportunity for the healthcare sector to examine its real estate decisions and adds to demand for convenience, Bolen said.

“Today’s senior citizens are quite a bit different from the senior citizens of times gone by. They are not satisfied to sit home and watch TV — it’s a very active senior citizen population,” Bolen said. “They want to stay healthy. If something hurts, they’re in their local physician’s office getting it fixed so they can go back to their lives of vitality and activity.”

Despite a seeming abundance of activity in 2022 and fresh opportunities for 2023, the healthcare real estate sector will face the same headwinds as any other real estate asset class, Rethink Healthcare Real Estate President Jonathan Winer said.

“A lot of people are focused on ambulatory real estate for next year. But the headwind against that, of course, is just pure capital allocation,” Winter said, citing dramatic changes to the spread between interest rates and cap rates leading to a 600-basis-point contraction over the past 12 months.

However, Winer stressed, fundamentals for healthcare real estate remain healthy.

“If you look at the last five years, the fundamentals for occupancy and rent growth have never been better,” Winter said. “This is a place investors want to be in times of economic stress, whenever that economic stress is.”

 

Source: Bisnow

Medical Office Buildings Continue To Stoke Net Lease Investors’ Interest

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Medical office buildings have emerged as a favorite among investors interested in single-tenant net lease opportunities, according to a new report from Colliers.

Overall, the STNL space posted strong performance in the first half of 2022 and hit a historic high of $40.1 billion in investment sales, according Colliers. However, volume in Q2 fell 35% over Q1 numbers and 17% year-over-year.

Despite that, the medical sub-sector remains strong. Colliers’ Jay Patel cites as one reason “predictable” cash flows and the price range on assets that appeals to both institutional and private investors alike. In addition, there’s COVID-19:

“Pandemic investors flocked to the medical office sector for its perception as a safe, interest- resistant and now pandemic-resistant asset,” Patel says. “During the pandemic, investors were eager to snatch up anything medical-related regardless of lease term, credit, and location.”

Construction pipeline delays have also contributed to an ongoing chasm between supply and demand, which has compressed cap rates.

“Net lease has also risen due to the ongoing supply chain disruptions, slowing the delivery of new product,” Patel says. “This has pushed more healthcare tenants to consider alternative space solutions like the adaptive reuse of traditional office or retail properties.”

Of course, the capital markets have changed this year — and medical office isn’t immune to those shifts. Patel notes that “while capital is still being deployed, investors are no longer scooping up just anything that’s healthcare assets.”

“Buyers are now taking a closer look at credit, lease terms and location. With inflation looming in everyone’s mind, assets that have strong rent increases are experiencing stronger activity,” Patel says. “To bridge the gap for investors that are feeling the burden of this rising interest rate environment, many developers and sellers are starting to shift pricing, which is creeping back toward pre-pandemic standards.

Colliers Julie A. Johnson predicts the asset class will continue to be strong in the near future despite rising capital costs.

“The past several years have been banner years for investors with historically low cap rates and many more buyers in the market than sellers,” Johnson told GlobeSt.com in an earlier interview. But “medical office buildings will continue to be strong with not only the increase of the senior population but also the population increase in many markets, specifically the Sun Belt cities.”

Patel says good lease terms and credit will be critical moving forward into 2023. While previously just one of those elements was needed to sell a property.

“Today’s market conditions necessitate all three factors carrying equal importance when appealing to investors,” Patel says.

 

Source: GlobeSt.

Investors Are Flocking To MOB And HRE Space

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Currently in the growing and highly visible medical office building (MOB) space, a couple of questions seem to be garnering most of the attention.

One of those is: Will the influx of new capital, including large amounts from deep-pocketed institutional investors and investment managers, slow down in the near future?

The other is: Will capitalization (cap) rates, or first-year expected returns, stop their unprecedented compression to historic lows, even amid rising inflation and potentially higher interest rates, anytime soon?

The answers seem to be “no” and “no,” according to a panel discussion that took place at BOMA International’s 2021 Medical Office Building + Healthcare Real Estate Conference held Nov. 1-3 at the Omni Dallas Hotel.

The session was titled “The Investor Flight Toward Healthcare Real Estate” and the discussion heavily focused on growing institutional investment in the MOB and HRE space, as well as soaring pricing and falling yields for the product type.

The panelists taking part in the session included two MOB sales brokers, two healthcare real estate (HRE) specialists with institutional investment firms that are somewhat new to the space, and a Wall Street research analyst who covers public companies. They were:

■ Moderator Ben Appel, executive managing director with the Healthcare Capital Markets group of Newmark Group Inc. (Nasdaq: NMRK);
■ Mindy Berman, senior managing director and head of the healthcare capital markets platform with Jones Lang LaSalle Inc. (NYSE: JLL);
■ Vikram Malhotra, managing director and research leader for Mizuho Americas;
■ Pratik Patel, director with New York-based Wafra Inc., which in late 2020 formed a $550 million joint venture (JV) partnership with Welltower Inc. (NYSE: WELL) that entailed Wafra acquiring an 80 percent ownership in 24 MOBs; and
■ Jennifer Wong, VP of acquisitions with Boston-based AEW, which has formed partnerships with firms in the sector, including a recently formed JV with Nashville, Tenn.-based Montecito Medical Real Estate that plans to spend up to $1 billion in coming years on acquiring MOBs.

 

Source: HREI