Medical Offices Project Hope Amid Gloom

The report by Yili Dolan, senior research analyst with Torto Wheaton Research, observes that "real estate investment tied to healthcare" has been "relatively unfazed" by developments that have reduced occupancies in the general office category in many markets. In looking at US demographics, a growing number of developers and investors "have determined that investments tied to healthcare are an attractive opportunity," he adds.

The Torto Wheaton report outlines why the medical office segment stands out against general office demand: "Baby boomers represent 26% of the US population and, now hitting 60, will place tremendous demands on Medicare and require a good deal of support from professional caregivers. In addition to aging baby boomers, the fundamental change in the way healthcare is delivered is the other demand driver."

By US Census estimation, there will be more than 85 million people aged 65 and over by 2050. "Needless to say, such this should create a bright future for medical office development and investment," Torto Wheaton's report concludes. As demographics shift, many hospitals, research facilities and other elements of the US healthcare sector have gone into expansion mode, according to the study.

The evidence supporting the report's conclusions can be seen in medical office deals being consummated of late. Despite rugged credit conditions and chancy capital markets that have prevented office REITs in general from raising capital, Long Beach, CA-based HCP, a healthcare properties REIT, recently completed a $500-million offering of 14.95 million shares at a price of $33.50.

HCP, which plans to use proceeds to repay a portion of its debt, owns healthcare properties across the country. Its holdings include 706 properties that range from medical office buildings to senior housing to life science, hospital and skilled nursing facilities. The Torto Wheaton report points out that on top of an aging population and other factors driving demand for medical office space that "with a high degree of government funding in the sector, there is more certainty in the income this sector can generate when compared to other potential tenants."

To buttress its case, the study cites figures showing that in the last seven months the overall economy has shed jobs while healthcare employment has continued to expand. Furthermore, growth in healthcare employment is forecast to average 2.5% per year for the next 5 years--160 basis points higher than overall employment growth. "As healthcare job markets remain strong, the assumption is that the requirements for medical space will be strong as well," Dolan says.

The generally positive prospects for the healthcare sector are more institutional investors will grow interested in the sector, Torto Wheaton's report says. It cites projected aging population and projected job growth among the factors pointing to positive performance in both near and long term. "The simple fact is that, in the face of a broader economic slowdown, growth in healthcare-related jobs stands out as a beacon of strength," Dolan concludes.