Connect Healthcare 2017—Where We Are & Where We Are Going
From leasing to new investor interest, the healthcare real estate sector is firing on all cylinders. That was the message five industry experts shared with a crowd hungry for information and insights at Connect Healthcare 2017.
This year is turning into a record-breaking year in terms of acquisition volume, according to Revista’s Hilda Flower Martin. Serving as moderator, Martin shared data points from her company, saying that volume is close to $20 billion, which surpasses every year the company has tracked data.
Everest Healthcare Properties’ David Lynn explained why investor interest in the sector is so strong, pointing to “very attractive” macrodrivers and real estate fundamentals, including increasing occupancy and rental rates and minimal supply.
“The medical occupier is risk averse and not keen to move,” Lynn noted. “I think that attitude will prevail. [It’s one of the reasons] investors see medical as a good defensive sector.”
Supply of quality assets, whether they’re medical office buildings, urgent care centers, or acute care facilities, isn’t keeping up with demand, according to Cushman & Wakefield’s Lorie Damon. “Healthcare is generating interest from investors who’ve never before invested in the sector,” she said.
Lynn agreed. “It’s like a light switch turned on and new investors came to the market,” Lynn said, adding that healthcare investing is more mainstream now. “I think investors are comfortable with the lower cap rates.”
Across the nation, volume and competition are driving down cap rates. According to numbers from Revista, on-campus buildings that previously traded above 6% have now dipped below that threshold.
“Nationally, the cap rates are going to get down to levels we’ve never seen before,” Damon said. “I think they’re going to go lower; we have no reason to believe they won’t.”
CBRE’s Bryan Lewitt, who’s based out of Los Angeles, said foreign buyers are more interested in the local market than domestic buyers because they “don’t like the cap rates.”
“Los Angeles is a gateway city where a lot of foreign buyers are investing in healthcare real estate,” Lewitt noted. “A lot of them are selling apartments at 3 or 4 caps and buying medical.”
Damon said she expects velocity to continue. “It’s a good time to be a seller,” she noted, adding that institutional long-term holders have decided now is a good time to sell. “That’s a relatively new dynamic.”
Some of Damon’s healthcare clients have bought back their portfolios. “They do not like uncertainty,” she explained. “When they’re evaluating the financial merits of control, the volume of new ownership entities who may or may not have experience in healthcare is giving them the jitters.”
The panelists also addressed new construction in the healthcare space. According to Revista, the number of square feet delivered annually continues to increase. There was a bit of a pullback in 2016, Martin noted, but numbers have rebounded since.
Damon noted that there are still a lot of cranes on hospital campuses, and Martin backed her up, noting that roughly 80 to 85% of hospital construction is expansion.
Medical Office Brokers’ Michael Morton explains that the cost of new construction makes it difficult for medical office tenants to move. “It’s tough to pay those rental rates,” he said.
Morton, when asked to speak about the Phoenix market where he operates, suggested that investors are attracted to the market’s underlying demographics—the number of Baby Boomers and the expanding population. Those demographics are encouraging speculative development, when lenders previously required 50% pre-leasing.
While Damon expressed surprise about the increase in speculative development, Lynn was dismayed. “It’s an interesting and disturbing trend to have spec development,” he said, contending that it’s driven by ebullience of the sector and new lenders in the space. “Spec development is a very scary proposition, but I don’t think the lenders will be wild or risky.”
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