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Why Experts Say Now Is The Time To Buy Medical Office Buildings

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Despite all the doom and gloom of the news about the office sector, one component remains strong: medical office buildings.

It is buoyed by a stable clientele, long-term leases, and a slow pace of new entries. Even better, the buildings’ tenants can rely on a steady flow of customers in need of care. The flow has even increased as a result of passage of the Affordable Care Act, an aging population, and advances in medical technology that enable more procedures to be delivered in lower-cost, more efficient outpatient settings.

And investors are paying attention, according to the just-released 2024 report “Emerging Trends in Real Estate” issued by PWC and the Urban Land Institute. In total, the U.S. healthcare industry represents 17% of GDP. Outpatient care and care provided in medical office buildings is a significant share of the total.

“The sector has also been shifting to a retail mind-set, where hospital systems and providers look to attract new patients and build market share in new areas, contributing to the increased demand for high-quality medical space,” the report noted.

For landlords, medical offices are practically ideal tenants. They may sign leases of 15-20 years and are likely to renew them in order to remain close to their patient base.

“Typically, the renewal rate is 80% or more and rent growth generally ranges between two and three percent a year,” the report stated. “These dynamics have helped the medical office sector maintain healthy fundamentals throughout economic cycles.”

Furthermore, occupancy has risen in recent years as space absorption has outpaced square footage added. The occupancy rate was 92.8% in 2Q 2023.

Nevertheless, “after reaching peak investment volumes of $30.2 billion (annual basis) in the third quarter of 2022, medical office transaction volume has since slowed to $20.2 billion as of the second quarter of 2023,” the report noted.

But while it has slowed, it has not stopped. Transaction volume totaled $4.7 billion in the first half of 2023 – lower than the $10.1 billion sold in the same period of 2022, but consistent with levels seen from 2018 through 2021. Few distressed sales have occurred. The report attributed the lower transaction volumes to a “disconnect” between sellers and buyers.

“But the stage is set for increases in volumes when buyers and sellers can better come together and the capital markets begin to normalize,” it said. “The medical sector is large and investable, comprising over 1.5 billion SF of current inventory. A substantial amount of opportunity exists for investors to take on more ownership.”

By square footage, over half the sector is owned by users – hospitals, providers, and physician groups. The rest is owned by REITs and private investors who use a variety of structures and vehicles to make it work, the report noted. Institutional investors often invest through operating partners, frequently vertically integrated regional or national firms that specialize in the development, acquisition and operation of medical office buildings and often have deep relationships with hospitals, health systems and physician groups.

Speculative development is rare, leaving inventory to increase at a pace driven by tenant demand, currently around 1% and seldom rising more than 2% a year.

The opinion of experts surveyed for the report is largely favorable. Some 48% recommended buying, 46.4% said hold, and just 5.8% said sell. And while 34.3% considered the sector overpriced, that was a much smaller percentage than viewed suburban and central-city offices as overpriced. Some 61.4% thought medical offices were fairly priced and 4.3% thought they were underpriced.

“The medical office sector has matured into an attractive and stable CRE asset class of its own,” the report concluded.

 

Source: GlobeSt

The Case For Growing Healthcare In The Middle Of Nowhere

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Rural healthcare can be a headache for leadership, one many systems won’t entertain. But for Wausau, Wis.-based Aspirus, it’s the whole model; it’s the growth plan.

Matt Heywood has been leading the health system for more than 10 years, and he’s always had the same motto, he told Becker’s: “Sometimes in chaos is opportunity.”

That’s certainly been true for Aspirus, which recently inked a deal with Duluth, Minn.-based St. Luke’s. The two entities will combine to form a 19-hospital system at a time when industry M&A has hit a major snag. Healthcare is dealing with an existential crisis and it makes sense that a lot of other systems are putting acquisitions on hold. But St. Luke’s and Aspirus share a similar mission — keeping healthcare local, maintaining consistent quality regardless of ZIP code — so a partnership made sense.

It’s not the first growth move for Aspirus, which is “tucking in” like-minded entities. In 2021, the health system acquired seven hospitals and 21 clinics from Ascension Wisconsin.

“With the Ascension acquisition, by getting that contiguous scale, we’re able to bring orthopedic services, surgical services closer to the patient than before,” Mr. Heywood said. “Because we were doing it on our own. And Ascension was doing it on their own. And neither one of us could effectively get enough scale to provide care to those patients.”

Rural healthcare requires a different approach, according to Mr. Heywood. Some locations are  immune to innovations sweeping urban areas; internet can be inconsistent, nixing telehealth offerings, and patients are widely dispersed, making it difficult to employ hospital-at-home programs. Instead of leaning on the new norm and centralizing care at a few in-person locations, Aspirus aims to expand physical sites of service.

“It’s a model I think a few others are trying, but not many. And the reason not many are trying is it’s a lot of work,” Mr. Heywood said. “It is a commitment that takes the management team, our physicians, and our staff a lot more energy than it would if we just said, ‘You know what? Let’s just ship everything to Wausau or Duluth and not have stuff out in the community for our patients.'”

It’s a delicate balance — sites can’t be too dispersed, because that’s inefficient. But care should remain as local as possible so cancer patients don’t have to drive hours for intravenous therapies. The more scale Aspirus has, the more resources and technology it can deploy, and the better connectivity to larger sites will be.

The health system also aims to utilize critical access designations to their maximum ability, making sure each site can do what it needs to do based on the community’s needs and size.

“We have some critical access hospitals, which we call ‘frontier,’ which are very much EDs with a few beds and clinics,” Mr. Heywood said. “But then you might have what we call a ‘super critical access hospital,’ which is doing outpatient surgeries, orthopedic surgeries, OB, things like that.”

One major challenge: staffing. Worker shortages are a nationwide issue, and rural areas are certainly not immune. Aspirus is working with local community colleges to create feeder programs, looking to employ talented people before they leave, according to Mr. Heywood.

“We are trying to sell that rural America, the Midwest, is maybe not so bad when you’re having Tropical Storm Hilary in Palm Springs, you’re having a major hurricane hit you in Florida, you’re having wildfires here and there,” Mr. Heywood said. “So what we’re trying to do is get people to see that staying close to home is not a bad thing, so we don’t have a flight from rural America that has historically been happening.”

The Aspirus model isn’t a conventional one, but Mr. Heywood has faith in it. Someone has to; about 100 million people live in underserved rural America, and on average, they die two years younger than their urban counterparts.

“You have to look out into the future and see what you think the future is,” Mr. Heywood said, “independently of what everybody’s telling you.”

 

Source: Becker’s Hospital Review

Healthcare Mergers: Expecting More In 2024

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Even with some high-profile hospital deals taking place in the first half of the year, merger activity across the broader healthcare industry has slowed a bit.

And KPMG is projecting that healthcare mergers and acquisition activity may be a bit more subdued for the remainder of the year. In the first half of 2023, there were 245 healthcare mergers, a 7% drop from the first six months of 2022, according to a report from KPMG.

“The pace of healthcare deals may not pick up more steam until 2024,” says Ross Nelson, KPMG’s national healthcare strategy leader for the provider and payer sectors. “We do think it’s going to pick up soon. I don’t know the exact date, but we’re hopeful that calendar year ’24 is certainly going to be more robust than the calendar year ’23.”

There have been some big healthcare transactions taking place in the beginning of the year, including CVS buying Oak Street Health in a $10.6 billion deal. UnitedHealth is purchasing Amedisys, the home health and hospice provider, in a $3.3 billion transaction. TPG and AmerisourceBergen completed a $2.1 billion deal to acquire OneOncology, a network of cancer practices.

Hospital merger activity is on the rise, and some analysts expect that to continue. In a deal that gained widespread attention, Kaiser Permanente agreed to acquire Geisinger Health, the Pennsylvania system. BJC HealthCare of St. Louis and Saint Luke’s Health System of Kansas City announced May 31 that they plan to merge and form an integrated academic health system. Aspirus Health, a Wisconsin-based system, and St. Luke’s of Duluth, Minn., said in July they plan to come together.

Headwinds And Tailwinds

Even with some big deals that have been announced, Nelson says a number of factors have slowed down some merger activity in the broader healthcare industry.

“The headwinds include higher interest rates, and if the Federal Reserve continues to raise interest rates, some organizations could wait before pursuing M&A plans,” Nelson says.

The Federal Reserve has raised its benchmark interest rate 11 times in the last 17 months, and it’s unclear if other hikes are coming, the Associated Press reports.

“If the nation moves into a recession, then that would likely cool healthcare merger activity,” Nelson says. “Some organizations are paying closer attention to heightened scrutiny from regulators, Nelson says. In some cases, the Federal Trade Commission has been vocal in opposing mergers and acquisitions involving health systems in the same market, drawing criticism from some in the hospital industry.”

Some hospitals have explored mergers with systems in other states to skirt regulatory concerns about the consolidation of providers in the same market.  UnityPoint Health and Presbyterian Healthcare Services said in March that they are exploring a merger, potentially creating an organization with more than 40 hospitals. UnityPoint operates hospitals in Iowa, Illinois and Wisconsin, while Presbyterian serves New Mexico.

“I think folks are looking at deals in other markets because they feel like often, the deals within their markets are having a tough time getting done,” Nelson says. “Even with deals involving organizations in different markets, regulators are taking a closer look.”

Nelson expects to see more hospitals teaming with other health systems or other partners on certain service lines to keep patients in their network.

“With hospitals that have assets that may not be as profitable as they should be, they may look for partners that might unlock revenue or cost synergies and they can share in the cumulative or combined bottom line,” Nelson says.

KPMG expects some of the economic pressures on merger activity to ease, leading to some increased deal-making.

“There is a lot of money on the sidelines that needs to be deployed,” Nelson says.

Some health systems could be looking at selling some hospitals in markets where they don’t have a commanding presence. Steward Health Care agreed to sell five hospitals in Utah to CommonSpirit Health earlier this year. In June, Ascension agreed to transfer Our Lady of Lourdes Memorial Hospital in Binghamton, N.Y., along with its physician practices, to the Guthrie Clinic of Sayre, Pa.

‘Unlock Value Creation’

As more care shifts outside the hospital, organizations could be looking to acquire more outpatient and ambulatory surgical centers. Investors could find opportunities in markets where the bulk of services are still being done inside the hospital, KPMG projects.

“Healthcare organizations considering mergers and acquisitions should think strategically,” Nelson says. “I think they should be continuously giving their portfolio a review of what’s kind of a core and non-core asset, or a performing or non-performing asset, within the existing portfolio.”

Organizations should stay disciplined about the thesis of their deals and valuations.

“You’ll get your chance to buy the right asset at the right price,” Nelson says. “For those that are buying assets, I would constantly look at how to unlock value creation or continue  do integration activities to unlock as much synergies and value as possible.”

Anu Singh, managing director and leader of partnerships, mergers and acquisitions at Kaufman Hall, told Chief Healthcare Executive in July that he expects to see more hospitals making deals in the months ahead.

“There are organizations that are looking for complementary resources and capabilities …  there are ones in the middle who have maybe some increased concerns about their long-term viability of remaining independent,” Singh said.

 

Source: Chief Healthcare Executive