Article

Healthcare real estate investment surges

Sustained demand overall has encouraged investors to look into alternative property sectors

September 04, 2019

Investment in healthcare-related real estate has risen dramatically in the last five years, with investors betting that medical facilities will be increasingly important to an aging population.

Medical building sales in the U.S. hit nearly US$10 billion in 2018, a figure that has nearly doubled from 2014, according to JLL research.

“Many institutional investors are realizing that healthcare property returns have been pretty solid and steady over time,” says Jay Johnson, a JLL managing director and National Practice Lead for Healthcare. “We expect that trend to continue for the foreseeable future, which explains growing interest from institutional capital.”

The investment volumes are emblematic of the broader shift in allocation to commercial real estate in the last decade, as investors hunted for returns in an environment with persistently-low interest rates. The sustained demand overall has encouraged investors to look into alternative real estate sectors like healthcare and student housing.

Deepening need

It wasn’t long ago that institutional property investors avoided medical office buildings, largely because they served a highly specific and specialized function. But healthcare spending by aging baby boomers has altered that point of view and propelled medical properties into the mainstream.

By 2030, all baby boomers in the U.S. will be older than age 65, according the U.S. Census Bureau. Five years later, the number of people 65-years-old and up will outnumber those under 18 years old. By 2060, one in four people – or 95 million – will be 65 or older, and 20 percent of those will be over 85.

Technological advances that allow doctors to monitor and engage patients remotely, as well as driverless cars and growing home care options, could keep many baby boomers living independently longer, Johnson suggests. In turn, that could extend care needs at outpatient facilities – and therefore more demand – as opposed to moving patients into long-term care facilities.

In addition to aging baby boomers, growing consumer expectations for convenient healthcare experiences have helped fuel the development of these outpatient facilities, from doctor offices in conventional medical buildings to same-day surgery centers in retail settings.

New development doesn’t appear to be exceeding demand, so overbuilding is probably a lesser concern for investors, Johnson says. Moreover, a radical reengineering of the system, such as “welfare for all” with a move to a single-payer system, would likely increase access to medical care and therefore increase the demand on the real estate needed to provide that care.  On the other hand, though, such a change would put heavy emphasis on cost reduction, paradoxically resulting in more demand for clinic space at lower rental rates, he says.

“Regulatory issues bring a certain amount of risk and unknowns,” Johnson says. “But no matter how you feel about potential changes, whether incremental or radical, it’s likely to bring more healthcare to more people, requiring more space to house clinicians and services.”

Expanding opportunities

The healthcare sector’s growth has caught the attention of retail property investors looking to diversify away from the troubled sector. Net-lease landlords  who are adding urgent care, physical therapy and other single-tenant healthcare assets to their portfolios have seen particular interest.

At Scottsdale, Arizona-based Store Capital, for example, rent and interest derived from medical and dental properties has doubled to 2.4 percent over the last two years. Over the last year alone, the company has increased its holdings of such assets to 73 from 43.

Meanwhile, according to Bain Capital, private equity investment in retail healthcare operators has moved from niche to mainstream. Annual revenue growth of around 3.5 percent, standardized protocols easily replicated across multiple locations, and insurance reimbursements mixed with patients paying out of their own pockets have made this possible.

The increasing private equity interest in healthcare operators should fuel an expansion of the facilities, giving a broader pool of net-lease investors more opportunities to own the buildings. Single-tenant medical office transactions have totaled around $2.5 billion for four straight years through 2018, which is about $1 billion more annually than the three years prior to that period, according to JLL research. What’s more, single-tenant medical buildings are fetching higher per-square-foot prices than the net-lease lease sector as whole, says Peter Bauman, senior vice president with JLL Capital Markets.

“As net-lease investors navigate the uncertainty of retail, the medical office space appears to offer an alternative, with strong, dependable returns that are less susceptible to disruption from e-commerce,” he says. “As long as trends in healthcare continue to point toward longer lifespans and increased care, medical office space will remain critical and demand will increase.”

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