DENVER-It’s a classic example of one person’s meat being another’s poison. The Affordable Care Act—ObamaCare to most—is, at best, a controversial issue. Its critics decry the coming cost hikes while its proponents hail the hoped-for leveling of the healthcare playing field.
Regardless of how you punt this political football, the healthcare real estate market is riding the wave of its impact. Cushman & Wakefield has been surveying the healthcare real estate market since 2004, and the results of its most recent study show an industry that’s pistol hot and growing. If there’s one area of sluggishness, it can be found in development.
“We’re witnessing core, class-A medical office assets trading at or above pre-credit crisis pricing levels,” says Jeffrey Piehl, a director in C&W’s Valuation & Advisory Healthcare Practice Group . “As the industry consolidates, demand for strategic off-campus ambulatory and urgent care locations is on the rise.”
But, reflective of most corporate issues these days, the squeeze is on big-time for health systems, and that’s not without its impact. “New construction is continually being pushed back as health systems work through major corporate integrations,” says Piehl, “as well as understanding the implications of healthcare reform.”
On the investment side, Piehl refers to healthcare REITs as the “darlings of Wall Street,” a fact since the last survey a year ago. You can credit the favorable capital markets and fundamentals in large part for that.
“Publicly traded Healthcare REITs are trading at or near their respective 52-week highs,” he says. “In comparison to our 2012 survey results, most of the REITs witnessed an approximate 15% to 50% increase in share price, which was fueled primarily by acquisitions, development and improving market conditions. This increase is corroborated by the decrease in the forward annual dividend yield in comparison to 2012 figures.”
Needless to say, the low-interest-rate environment greases the investment skids for all income-producing properties, healthcare included. The survey shows that “investors are able to obtain mortgage financing for well-sponsored MOBs at rates generally ranging from a low of 3% for owner-occupied properties to approximately 4.5% for typical assets.” The survey also puts LTVs anywhere from 60% to 85%.
Cap rates for class A on-campus assets averaged 6.67%, the survey reveals, while rates for class B on-campus buildings averaged of 7.94%. “Investors generally use a terminal capitalization rate of approximately 25 to 75 basis points higher than the going-in capitalization rate,” Piehl says.