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LOS ANGELES-An increasing number of REITs are exploring the healthcare sector for investment opportunities, say several expert sources. The demand for properties in this asset class continues to rise as institutional investors look for safe havens in a post-recession environment.
“I think that healthcare has been a relatively stable and strong sector of real estate because many investors view it as lower risk and somewhat recession proof,” David Lari, a partner with Cox Castle & Nicholson LLP here, tells GlobeSt.com. “While most real estate sectors were negatively impacted by the most recent economic downturn, the impact on the healthcare sector was not, generally speaking, nearly as dramatic. We have an aging population with a growing number of Baby Boomers entering the senior citizen demographic, resulting in an overall increased need for healthcare services. In addition, the Affordable Care Act is anticipated to provide millions of currently uninsured Americans with access to primary healthcare services.”
Led by a number of REITs’ seemingly insatiable appetite for healthcare-related real estate assets, particularly medical-office buildings, the sector is continuing to grow at a steady rate. There have also been many M&As in this field over the past couple of years, indicating a continuing trend toward healthcare-related activity, Lari adds. “This is a hot sector in terms of acquisitions and transactions of medical-office buildings and other healthcare assets.”
One fascinating angle, which Lari also predicts will continue, is that some REITs and other companies that may not have previously considered investing in healthcare-related properties are now beginning to eye the field. “REITs in general are doing well, but healthcare is one of the more popular sectors. The success of the healthcare REITs is not going unnoticed.”
Chris Stai, a broker in the healthcare space with Newmark Grubb Knight Frank, concurs with Lari. “In the last three to four years, four new healthcare REITs have been introduced that weren’t on the landscape previously. It comes down to aging demographics and technology allowing more outpatient procedures in a lower-cost setting. Obamacare with more than 40 million newly insured in 2013 and more demand for preventative outpatient care vs. emergency rooms.”
As GlobeSt.com has previously reported, healthcare reform bodes well for MOBs. “The competition for cost efficiencies is prompting more off-campus, retail-centric real estate moves because healthcare providers want to access their patients in a wider, more convenient way for the patient,” Stai tells GlobeSt.com. “Technology and physician extenders—skilled nurses and physician assistants—enable high-quality patient care in communities away from the hospital-campus setting.”
Generally speaking, smaller private investors are looking for slightly different qualities in potential healthcare assets than REITs are. “REITs often seek relatively safe transactions involving quality assets with high occupancy rates which provide a stable income stream,” says Lari. “Some private investors on the other hand, in part due to the competitive market for stabilized quality healthcare assets, are seeking higher risk, higher reward opportunities—these investors desire assets that they believe are undervalued based on potential growth as opposed to current revenue.”
Even though the two investor types may not be seeking the same properties, competition for healthcare assets is still high, in part because of one critical fact: the availability of historically low debt is compressing cap rates, and REITs may be willing to pay more because the debt is so cheap, which drives prices up. This is causing some REITs to pursue assets that private investors may also be considering.
Lari says that the stock prices of some healthcare REITs—and REITs in general—continue to rise and probably will continue to do so through 2013. “As other sectors of real estate start to improve—which I think they have been—people may start to go into other sectors that could provide greater returns. The only worry would be an oversaturation of demand, which is hard to predict.”
To keep up with the high demand for healthcare real estate, creative brokers are diligently working to create a supply side by going out and speaking directly with hospitals—many of which own their assets—and other medical groups to inquire about their willingness to sell, says Lari. “Typically speaking, owners will have a price. The demand is such that more and more brokers are creating more supply by seeking out assets that were not on the market and either bringing them to market or structuring off-market deals.”
Are you a healthcare real estate investor noticing a change in the landscape? Tell us about it in the comment box below.