Medical outpatient buildings have become an important area for CRE investment according to a recent JLL report and a new joint venture between Healthcare Realty Trust and KKR announced this week is an example.
The two companies will jointly own and invest in the property type. Under the terms of the agreement, Healthcare Realty will contribute 12 of its existing properties to seed the JV at a value of $382.5 million, representing a cap rate of approximately 6.6%. KKR will make an equity contribution to the JV equal to 80% of the value of the properties. Healthcare Realty will retain a 20% interest and will manage the JV, as well as continue to oversee day-to-day operations and leasing of the properties. KKR has also committed up to $600 million to the JV to pursue additional acquisitions or contributions of assets.
Healthcare Realty expects roughly $300 million for the dozen seed properties. The two companies will continue looking for and investing in additional buildings.
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The decision to move in this direction makes financial sense given five conditions in play, according to JLL:
1. "Demographic trends, technology and reimbursement changes continue the shift toward outpatient care, driving demand for outpatient medical buildings." 2. "With the shift, demand for outpatient medical space is steady, but rising financing costs have limited construction, pushing overall occupancy and rents upward." 3. "Health systems and providers face thin margins while landlords also face rising costs for maintenance and renovation." 4. "Sun Belt markets are seeing high rates of population growth, which in turn will drive increased outpatient volumes in those regions." 5. "Transaction volumes for outpatient medical dropped in 2023 due to financing challenges but will pick up once interest rates stabilize, as the sector is in favor with investors seeking stability."
Brought together, it means that demographics, the costs of care, and the ability of outpatient treatment to help control costs make the latter an important aspect of healthcare strategy. Some areas like the Sun Belt are seeing heavy population growth, making outpatient treatment critical. However, construction is extremely expensive — not just financing but building costs are up about 43% since pre-pandemic times — so it takes fiscal muscle to repurpose or build facilities.
That's why joint ventures, like that of Healthcare Realty and KKR, which can pull together the resources to satisfy pent-up demand have a good shot at serious return on investment.
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