Healthcare Properties Show 'Sound Underlying Drivers' Despite Headwinds
Investors continue to eye outpatient surgical centers, properties with specialized infrastructure as prime targets, says Marcus & Millichap’s John Chang
Medical office remains one of the most highly sought-after property types for commercial real estate investors as demand drivers remain strong, according to one industry expert.
“Many investors consider medical office to be a comparably secure investment alternative despite recession risks, but offer upside potential over the mid- to long-term horizon,” says Marcus & Millichap’s John Chang, who sat down with GlobeSt in advance of his keynote at this week’s GlobeSt Healthcare conference in Scottsdale, Ariz.
“Over the long-term, healthcare related properties have sound underlying drivers,” he goes on. “Although telehealth and other innovations may make access to healthcare easier, it will not fully replace doctor visits or the need to go to a medical facility. Outpatient surgical centers and other properties with specialized infrastructure or that are equipment intensive will garner the most investor interest. Although there is some new development in the space, it has not been keeping up with demand, especially in metros with outsized population growth like the Southeast, Texas and the Southwestern US.”
With that said, however, rising capital costs have forced buyers to recalibrate their underwriting, which Chang says has lifted cap rate expectations by 100 bps to 150 bps since the beginning of the year depending on the tenant composition, location, lease structures, and other factors. Additionally, “investors are focusing on assets with inflation escalators, with 3% per annum increases being the target threshold,” Chang says. “Many sellers have been reluctant to meet the market, which has introduced a widened expectation gap, in-turn slowing transactional velocity.”
Investor favorites include properties with high credit tenants and in-place long-term leases, as well as facilities with significant medical infrastructure and heavy equipment such as surgical centers.
“Investors are also looking at the tenant profiles and their staffing reliability,” Chang notes. ”The exceptionally tight labor market has created some substantive headwinds for medical services, so the reliability, durability and tenure of tenant staff has become relevant when investors consider their acquisition targets.”
Check back soon for more insights from John Chang and other panelists at the GlobeSt Healthcare conference in Scottsdale, Ariz.