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The Top Three Reasons Why Healthcare Real Estate Is Recession-Resistant

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This has been a roller coaster of a year when it comes to the economy, and many are talking about the potential of a recession happening very soon.

According to the Conference Board Consumer Confidence Index, August has been just slightly down. Consumer spending makes up 70 percent of the U.S. economy. If sentiment moves down, consumers and purchasing managers begin to curtail spending and an economic slowdown is inevitable.

Unfortunately, the more the news and articles focus on the impending recession, the more it becomes a self-fulfilling prophecy. Other signs that point toward a potential recession include an unemployment rate that is at the lowest point in 49 years, trade wars that are causing material prices to increase, and geopolitical unrest abroad that could have a huge impact on the U.S. economy. On the bright side, wages appear to be moving up, initial unemployment claims remain low, interest rates support continued investment and inflation remains in check.

There is a close correlation between real estate values and the health of the U.S. economy, but like most things, it is quite nuanced. As companies retract and give back space, occupancies fall and therefore so does the value of commercial real estate. This problem is exacerbated when debt covenants are violated and/or maturities occur during a recession, often requiring re-margining of the debt and/or a fire sale to meet an impending maturity.

With all this in mind, one of the safest asset classes in commercial real estate during a recession is medical office. Below are three reasons behind this.

Tenant Retention

Medical tenants tend to be “stickier” than their general office counterparts. This is because landlords and their provider tenants typically make a much higher investment in the physical space and sign longer-term leases.

The current cost of typical West Coast medical tenant improvement is in the mid-$100s per square foot. In a contracting market, landlords are reluctant to make the necessary investment to entice medical tenants to move, and tenants themselves become more resistant to funding tenant improvements in times of economic uncertainty.

Under normal circumstances, medical tenants are “stickier” because they need to maintain a consumer-facing presence, more akin to a retailer. While consumers may cut back on their lattes during a recession, they are less likely to forgo medical attention and, often, services are covered by insurance. Even those consumers that lose their jobs are often covered by government plans, which helps to moderate the impact and allow them to continue seeking medical care when needed.

Demographics

Medical office also has demographics on its side. According to the U.S. Census Bureau, the number of Americans age 65 and older is expected to double over the next three decades.

An aging population requires more healthcare professionals and more space to deliver medical services. The silver tsunami’s demand for healthcare will cause the patient volume to increase beyond what the current infrastructure can support.

A recent article by The National Center for Biotechnology Information reports that patients age 65 or older make up 13.5 percent of the U.S. population, but represent over 45 percent of the utilization of healthcare. As this age cohort swells, we will need more physical space to meet the demand, as well as physicians and other medical practitioners.

Supply And Demand

A substantial rise in capital has occurred in this sector that is tied to a greater awareness and acceptance by investors of the durable income characteristics of medical office. There is up to $5 billion of buying power in this industry, which is reinforced by the need for late-cycle defensive plays in a challenging return environment, according to the August Healthcare Capital Markets Perspective report from JLL managing director Mindy Berman.

Healthcare is part of the wave of capital raised in niche sectors, notably outraising traditional real estate classes by a factor of four to one. An uncertain economic forecast and low interest rates create higher medical office rates and attractive, stable returns.

The supply of healthcare real estate is low; the sector is a fraction of the size of general office. The institutional investors and REITs are long-term owners, while the healthcare systems themselves own upward of 70 percent of the real estate in this space. This limited supply, coupled with the aforementioned capital, makes the space attractive.

The fundamentals of healthcare real estate are solid. Though a recession could be around the corner, Meridian, a developer and investor specializing in healthcare developments, believes real estate will remain a strong investment. An aging demographic, desire for recognizable, accessible space and the fact that demand continuously outweighs supply in this sector all contribute to this viewpoint.

 

Source: REBusiness Online

Fort Worth’s Near Southside Primed To Become Innovative Economic Force

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Earlier this year, Fort Worth leaders had plans for a first-of-its-kind medical innovation district south of downtown, an ambitious undertaking that could attract medical-related enterprises to the city and potentially could become an innovation hub.

A new JLL report shows just how much Near Southside has grown over the years—with the potential to become a major medical hub. The city’s plan would connect existing medical institutions and organizations with startups and business incubators with hopes to attract thousands of additional healthcare and technology-related jobs to the area, according to JLL’s report.

Near Southside is already home to major healthcare centers such as Cook Children’s Healthcare System, Texas Health Harris Methodist, Baylor Scott & White, and Medical City Fort Worth.

The 1,400-acre area known as the Medical Innovation District called Near Southside (PHOTO CREDIT: Fort Worth Economic Development Department)

In the report, JLL examines the history and future of the 1,400-acre area called Near Southside. JLL refers to the Fort Worth district as “an emerging mixed-use district” where some of the city’s newest retail, office, and multifamily housing projects are located. The area has roughly 30,000 people employed within its boundaries, making it the second largest employment center in Tarrant County outside of downtown Fort Worth.

INTERACTIVE MAP: JLL map shows the growth from 2007 to 2019 in the Near Southside

The Near Southside area was first developed in the early 1900s in the area north of the Fairmont residential neighborhood. A nonprofit, member-funded organization called Near Southside Inc. was formed in 1995 to look after the area’s development. The nonprofit also manages Tax Increment Financing (TIF) District No. 4, which was created in 1997 to help with revitalization efforts.

In the ensuing years, Near Southside has seen major economic growth. The district’s taxable value was $229.7 million in 1997 and $729.3 million in 2017, according to JLL. Near Southside is projected to have increased its base value by just over 350 percent to over $1 billion by fiscal year 2024.

Improved Infrastructure And Housing Growth

Infrastructure in the area has been improved with the 2014 retrofit of West Rosedale Street from a six-lane road to a four-lane street with bike lanes, on-street parking, and pedestrian improvements. An $8.5 million reconstruction of South Main Street also happened last year.

The Hemphill-Lamar Connector, a $53 million tunnel under Interstate 30 with rail lines providing another downtown route, is scheduled to open in 2020.

Housing in the area has also seen growth in recent years with roughly 2,000 multifamily units having been built since 2000 and three more currently under construction. On top of this, an additional 300 units have been proposed, including a 10-story mixed-use project.

A proposed 2.1-mile extension of TEXRail southwest would add a new station to serve the major hospitals in Near Southside. Those hospitals provide a major economic and employment base for the area, according to JLL.

According to a 2014 study by the University of North Texas, the healthcare facilities in Near Southside have an annual economic impact of $4.2 billion for the city of Fort Worth and $5.5 billion throughout Tarrant County.

Robert Sturns, the economic development director for the city of Fort Worth, told Dallas Innovates earlier this year that the hope is Near Southside would “become the most livable medical district in the U.S.”

Creating a medical innovation district in Near Southside was a key finding from the Economic Development Plan accepted by the City Council at the end of 2017. The plan’s goal is to compete successfully on the national and international stage for “creative, high-growth businesses and the talented individuals who fuel them.”

The University of Texas at Arlington’s Center for Transportation, Equity, Decisions and Dollars was contracted to study the district’s needs and strengths, and Schaefer Advertising is expected to develop messaging and a brand for Near Southside Inc.

Near Southside has been a focus of innovative thinking in placemaking for years. The Brookings Institute’s global urbanization specialist Bruce Katz noted in 2016 that the area was “one of the most eclectic micro-economies I’ve ever encountered,” featuring everything from cultural and fine arts to hospitals and beer and whiskey manufacturing.

 

Source: Dallas Innovates

Life Sciences Space Continues To Be In High Demand, With Low Vacancies And Rising Rents

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Expansion in medical research around DNA is driving growth in the biotech sector and boosting demand for life science space.

Advances in technology over the last decade changed the way medical scientists work, first modeling their theories or ideas on computers before taking them to the bench, according to Steve Purpura, vice chairman of the Boston consulting practice and lead/director of the life sciences practice group with real estate services firm CBRE. As a result, the allocation of lab space in research facilities decreased from a 50:50 office to lab ratio a few years ago to 60:40 today, he notes.

This trend is likely to continue, according to Roger Humphrey, executive managing director and leader of the life sciences group with real estate services firm JLL. Commenting on JLL’s “Journey to the Next Gen Lab,” a report citing a trend toward greater agility in research space design, he noted that wet lab space in research facilities is shrinking, while flex and office space for computational science is growing as scientists spend more time analyzing data. The report shows that flexibility in lab space design and location is required to allow sudden shifts in research priorities and access to talent.

But aggregated demand for highly sophisticated lab space and cutting-edge pharmaceutical production facilities has exploded with expansion of the industry into personalized medicine and increased capital flowing to life science research and development. According to the most recent CBRE life science report, venture capital investments in life science are up 53 percent compared to 10 years ago.

The advent of personalized medicine has spawned a subset of life science industry incubators and early-stage companies focused on developing and manufacturing “small batch” pharmaceuticals, adding pressure to the demand for lab space within or nearby life science clusters, according to Frank Petz, managing director of JLL’s Boston-based capital markets group.

As a result, core life science markets—Boston-Cambridge, San Francisco, San Diego, the Raleigh-Durham Research Triangle and Seattle—are enjoying construction booms and growth in rents, which have escalated more than 50 percent over the last three years, according to the CBRE report.

The boom in funding has also increased competition and furthered the talent war between life science companies.

“The cost of rent is low on the list of their concerns,” says Petz. “It’s all about talent.”

Therefore, locations with premiere research universities and teaching hospitals outside core life science markets are also seeing construction of new research facilities, as life science firms seek STEM talent to fill the growing number of job vacancies.

According to the CBRE report, life science employment soared 23.5 percent to nearly 1.7 million workers between 2001 and 2016, compared to 10.2 percent for overall U.S. employment. Additionally, the rapid pace of technological advancement in the life science sector generated a 26 percent surge in biotech jobs between 2013 and 2016.

Urban markets with premiere universities and teaching hospitals, such as Philadelphia and New York City, have growing life science clusters because they offer the largest STEM talent pools, according to Purpura. While developers are replacing obsolete buildings in these markets with 10-story research facilities, office and industrial buildings in suburban markets, specifically San Diego and Raleigh-Durham, are being converted to lab space.

Humphrey also stresses the need to build flexibility into research space, so scientists can easily reconfigure workspaces to accommodate different types of research and facilitate collaboration with colleagues.

Mobile benches and unassigned workspaces, for example, allow for fast changes in personnel and type of work performed, he notes. In addition, hanging retractable electrical cords from the ceiling, so users aren’t limited to placing equipment against walls, and hiding technical infrastructure behind facades can allow easy movement of people and equipment.

 

Source: NREI