Waiting for a Health Care CMBS

WASHINGTON, DC-The health care real estate asset class has fared better than most over the course of the recession. Lenders are willing to finance not only acquisitions but new construction as well, and at relatively reasonable terms, say participants at this year’s NIC conference, which is being held in Washington, DC this week. "We are seeing activity at all levels of the banking spectrum," said Nancy Herman, principal with Resor Financial Group, during one of the panel sessions. "Everyone from community banks to the large money banks." The latter, she said, not surprisingly tend to offer the most sophisticated deal structures and large-sized transactions. "However we also see community banks do large sized loans as well," in some cases as high as $25 million. Resor, she added, even sees a healthy level of construction finance available for health care facilities both in the private sector and from the GSEs.

The reason for this largeness, to some extent, is the nature of health care real estate itself--unlike office or retail, it is driven by need and underwritten in large part by Uncle Sam via Medicare. Then there are the GSEs, whose support, like in multifamily, has been a bulwark for the space.

Ironically for both those reasons--the complicated nature of the business and the presence of the GSEs--there has not been a healthcare CMBS since these securitizations re-emerged after the crash. In fact, according to panelist Vic Clark, central regional manager with Walker & Dunlop, there hasn’t been a single health care loan securitized at all in any of the CMBS 2.0 pools as far as he can tell. "HUD and Fannie and Freddie are too competitive," he told GlobeSt.com after the panel session. "The Wall Street banks recognize that they can’t compete with them."

The good news, Clark believes, is that this is set to change. "We have been talking to Wall Street banks, B piece buyers and we think there are going to be health care loans securitized next year,” he says. The reason, again, can be found at the GSEs. "That is how their exit strategy for these loans."

Indeed, the GSEs are slated to increase production of their lending next year, panelist Cary Tremper, an executive with KeyBank Real Estate’s Healthcare Group said. Demand for GSE paper is strong, he noted--pointing to the week of the S&P downgrade of US credit, a time when Freddie Mac went to market with one of its securitizations. "Not a single borrower backed out of the deal," Tremper said.

Panelists, though, were quick to note that health care has not been completely immune from the economic forces of the last 36 months: underwriting, all agreed, has become much more conservative. "Pro forma underwriting is not what it used to be," Herman joked. "No one is willing to take on sponsorship risk either," Tremper added.