DOCPROPERTIES joined owners, investors, healthcare companies and commercial real estate service providers at the Revista 2022 Medical Real Estate Forum to learn more about increased demand for healthcare real estate. Trisha Talbot, managing principal, shares the key takeaways for her clients and partners.
- Medical real estate is a lower-risk investment. Although many offices were vacant during COVID-19 shutdowns, healthcare was one of the commercial real estate asset classes that maintained healthy returns because it is mission critical and demand driven. Landlords reported more than 95% of rent was received throughout the pandemic.
- Healthcare real estate is a considerably different asset class. While new investors entering the market have caused increased demand, landlords must understand these tenants have a different purpose and needs than retail, law firms, or other commercial uses.
- Cap rates are lower on campus. Not surprisingly, on campus cap rates are lower than off campus. The 2021 national average was 6.2% off campus, compared to 5.4% for on campus. Medical districts, or densely concentrated property developments, were approximately 6%. The credit of the tenant or tenants in the property and the lease rates have an effect on the cap rate in both locations.
- Non-hospital affiliated and third-party developed construction increased in 2021. Hospital-developed remained the same year over year, as did hospital affiliated construction starts.
- Overall healthcare real estate development is on the rise. A panel of real estate investment trusts (REIT) and large private investment investors revealed healthcare real estate development increased 17 to 25% last year.
- Demand and prices for portfolios and “perfect assets” are also increasing. Many buyers are chasing the same deals and there is a lot of capital looking to be deployed in healthcare real estate assets given its stability and risk profile that is attractive.
- Cost of capital will increase along with interest rates. Investors are watching the increase in interest rates closely and its effect on healthcare property pricing. Public REITS, with a higher cost of capital that private investment companies, are going to be affected first and will have to look at different healthcare asset types and consider different markets moving forward.
- Investors are aggregating smaller properties in smaller markets. Some investors have already made some changes to their investment profile and are looking at smaller properties in different markets to be able to compete with the demand of healthcare properties. Prices and opportunities are more favorable.
- Understand the buyer profile. An investor looking for cash flow will want a property that is leased and require little to no capital improvements. An investor looking for a higher yield, typically using the internal rate of return (IRR) as a measure, are typically looking to buy with upside so they can lease or improve a property and turn it around to sell it.
- Recapitalization. In 2022, investment firms with expensive debt opted for the recapitalization strategy with assets under management allowing for better investment returns and/or cashflow.
Revista’s website contains a chart with additional insight into medical office buildings (Phoenix falls in the top 50 metro areas):