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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

Five Fast Facts: A Quick Shot Of Healthcare Trends

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Cushman & Wakefield’s Healthcare Advisory Practice presents five trends related to medical office investment. From sale activity to leasing and absorption to GDP spending, this growing sector plays a significant role in the country’s economy.

The trend toward lower cost outpatient care and an aging MOB inventory are fueling everything from a rise in Urgent Care centers to growth in medical office rents to consistent construction output. The sector continues to look strong through the end of 2019. See below for Cushman & Wakefield‘s summary of Q3 medical office trends.

Source: HREI

Medical Office Buildings Still Rule The Outpatient Space In Healthcare Real Estate

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Of the five main outpatient facility types, medical office buildings (MOBs), urgent care centers and ambulatory surgery centers (ASCs) have the most positive outlooks and futures in the healthcare and healthcare real estate (HRE) sector.

On the other hand, the outlook is not quite as positive for micro-hospitals, which have a “moderate” outlook, and freestanding emergency departments (FEDs), which have a “negative” outlook. That’s according to a scorecard, if you will, compiled by well-known healthcare research and consulting firm The Advisory Board Co., which is based in Washington, D.C., and is part of Eden Prairie, Minn.-based Optum.

Providing insights into The Advisory Board’s rankings and outlooks for the various outpatient property types was the company’s Fred Bayon, managing director. He did so during a 100-minute presentation that covered a wide range of topics affecting the healthcare sector during The Colliers National Healthcare Conference, held Sept. 12-13 at the Hyatt Centric Chicago Magnificent Mile.

“My job with The Advisory Board is to travel around the country and meet with our members … hospitals and health systems, C-suite executives and the health system boards of directors and let them know what’s happening in the healthcare market place, what they need to be strategizing about and be aware of concerning healthcare policies and healthcare changes and issues,” Mr. Bayon told the audience.

Near the end of his presentation, which included plenty of insight into current healthcare policy and disruptors to the status quo, Mr. Bayon gave the firm’s outlook on the various property types.

As has been the case for several years, The Advisory Board is most optimistic about the short- and long-term prospects for MOBs. The rise of MOB development and investment has occurred in large part because they allow hospitals and health systems the best and most economical way to enter new markets, to protect market share, to provide convenient access to patients and to help facilitate the coordination of care.

“The MOB market continues to be a positive, intriguing play for hospitals, health systems and investors,” Mr. Bayon told the audience. “Those players are and will remain interested in MOBs for years to come because they “are conveniently located, essentially for Medicare patients and commercially insured patients. Health systems do not want their patients to have to come downtown, they don’t want you to come into the maze that is the big hospital campus. Instead, they want you to go somewhere where there is parking and where there is a pleasant atmosphere, because that’s where they think they can drive volumes.”

The Advisory Board gives its next highest ranking to ASCs — which, even though they carry some risk because of the lower-profit margins they deliver — will continue to experience increased volumes in years to come, he said.

Mr. Bayon noted that volumes in ASCs are expected to increase by nearly 28 percent by the year 2027, driven in large part by ongoing policy changes by the Centers for Medicare and Medicaid (CMS) that will “reimburse Medicare procedures done in ASCs. For example, total knee (replacement) and some cardiac procedures” have recently been added to the list of procedures that, when done in ASCs, will be reimbursed by Medicare.

Also receiving a positive score, or outlook, from The Advisory Board are urgent care centers, which the firm is “pretty bullish on,” Mr. Bayon said.

“More and more health systems are looking at urgent care centers and having some sort of investment in them, or some sort of partnership in sites across the United States,” Mr. Baynon said. “We still see these growing rather rapidly and for us, this is becoming a primary care alternative that can alleviate some of the capacity crunch for primary care in some markets.”

Even though The Advisory Board is not as bullish on FEDs and micro-hospitals, Mr. Bayon noted that the firm is “neutral” on the facility type, as those that are placed in the right locations can provide benefits for health systems, especially when they are expanding into new markets.

“Micro hospitals, the eight- to 12-bed hospitals can help a system bring together some inpatient and outpatient services, with core services being acute care, emergency care, pharmacy and additional services,” Mr. Bayon said. “(Micro-hospitals) continue to be a big, big play in the Texas marketplace, but we can see this growing in other markets as well. What’s interesting about micro-hospitals for developers and healthcare providers is that these facilities are not subject to site-neutral payments, meaning they can bill at inpatient rates and then they can generate their own on-campus or off-campus definition, meaning they can put outpatient services within 250 yards of those micro-hospitals and not be subject to a site neutral rate. For us, I would say that right now we are pretty neutral on micro-hospitals.”

The Advisory Board gives its lowest ranking, or outlook, to FEDs, which, in some instances,

“One of the things to keep in mind is that government payers do not reimburse freestanding emergency departments, but they are dotted across the United States and there are some hospital systems that believe such facilities are something around which they can build more services over the longer term,” Mr. Banyon said.

The Advisory Board, however, has a negative outlook on the facility type in large part because “they could drive unnecessary utilization if we see a preponderance of them.

“And I think that CMS could look at decreased reimbursement to FEDs moving forward,” Mr. Banyon continued, “and this is not to distinguish between an ED in a hospital setting and a freestanding setting. That’s a big risk for health systems.”

 

Source: HREI