Investors have discovered that no real estate sector is immune from the volatility in the debt market, even the normally stable medical office building category. Year-to-date sales volume for medical office centers is down about 62%. The average deal year-to-date in 2023 is about $9.6 million. Smaller deals continue to get done but not as many portfolio transactions are occurring as have normally taken place in a given year, according to CBRE’s Chris Bodnar, Vice Chair and Head of Healthcare Advisory, Americas.
Simply put, the fewer numbers aren’t because there’s less demand but because of limited availability of debt at the higher price points, without a lender needing to syndicate the debt on their side, Bodnar said.
Also, the cost of debt here is not unusual, but similar to what’s happening in other real estate sectors, he said. In the last quarter, cap rates for medical office centers averaged about 7.1%, the highest they’ve been in the last seven years.
Pricing also remains in the mid-to-5 high cap price range, and buyers are competing on an all-cash basis or on lower leverage, Bodnar explained. “While debt has obviously changed as it has in other product types, there is still liquidity for those core products if that makes sense,” he said.
What is now affecting the cost of debt in this sector is the product type, whether it’s medical offices, surgery centers or post-acute-care facilities. Lenders take a careful look at the specific type in deciding and also consider its operations, length of lease and credit behind the company, Bodnar said. This accounts for a lot of variability in debt terms and who the lender is–such as a bank. But what’s new now, he said, is that some CMBs are entering the medical office market. “Historically, it was a debt choice of last resort,” he said.
Bodnar also points to some solid fundamentals as a reason for optimism. First, about 1.5 jobs exist for every individual seeking employment in it, and more than 70,000 jobs have been gained since last August, which follows similar gains from the prior month. Second, the medical office center product type is not dependent on disposable income, manufacturing or having to perform a task in a home environment. “It has to be done in a medical office setting,” he said. Third, patients still seek care on a need’s basis and approximately 92% of the population has some form of healthcare insurance. Fourth, occupancy rates continue to perform well, hovering around 92%.
In looking ahead toward the next 18 months–and back a bit more, Bodnar views the sector as a “very functional real estate market,” yet always dependent on liquidity for debt. “We have some of that liquidity now in healthcare, and it’s limited to lenders who understand the segment.” Overall, he sees it as a “phenomenal buy opportunity as cap rates have risen at a slightly higher pace than, maybe, multifamily or industrial.” History also may repeat itself here, and in the past healthcare has offered a better risk-reward profile in times of volatility. That was experienced in the Great Financial Crisis, when it was the only industry sector to add jobs every single month.