For 2014, the Centers for Medicare and Medicaid Services (CMS) projects a 7.4 percent rise in national healthcare expenditures, which should benefit most real estate investors with a stake in the sector.
On a long-term basis, the outlook also looks favorable, with the federal agency projecting health expenditures to experience compounded annual growth of 6.2 percent from 2015 through 2021.
These positive long-term demographic trends – centered on the aging of the Baby Boom generation – have long fueled the engine of healthcare real estate (HRE) investing. It's no secret that Baby Boomers spend about twice as much on healthcare as the general public.
As a result, healthcare real estate investment trusts (REITs) have, for the most part, prospered, becoming a dominant market force during the past decade as eager investors have snapped up equity shares in an effort to conveniently cash in on the “Silver Tsunami.”
The growing healthcare spending projections are not based solely on demographics, however, as the anticipated impact of the Patient Protection and Affordable Care Act (PPACA) is also playing a big role. As more people sign up for health coverage, demand for healthcare services and healthcare facilities should get a boost.
As a result of such, the major financial rating agencies, such as Fitch and Standard & Poor's, anticipate another strong year for healthcare REITs despite some stock price volatility in 2013.
“The rating outlook for healthcare REITs is stable for 2014,” Fitch Ratings said last month in its outlook report for the sector.
Standard & Poor's concurred: “We expect healthcare REITs to deliver low-single-digit same-store NOI (net operating income) growth in triple-net-leased investments and medical office portfolios.”
But those optimistic forecasts come with caveats. The primary risks to watch include rising interest rates, falling federal reimbursement rates and potential increases in supply.
In some ways, rising interest rates could be beneficial for healthcare REITs, especially those involved in senior housing, according to the St. Louis-based investment banking firm Stifel.
“Higher interest rates mean seniors have more disposable income,” Stifel real estate analysts reasoned in a recent report. “This could lead in our view to some firming of or higher seniors housing monthly rents, further enhancing an expected improvement in pricing power in 2014 as the industry approaches 90 percent occupancy.”
Interest rate increases brought on by stronger economic growth “are a definitive positive for REITs,” Fitch agrees.
However, rising interest rates can also wreak havoc on most investments, including healthcare REITs. Why is this? Ironically, one of the fundamental characteristics that makes healthcare REITs relatively more attractive – longer-term leases – also makes them more susceptible to rapid interest rate increases. That's because if lease rates are locked in for a longer period, healthcare REITs will need to go longer without rent increases as their costs presumably rise more quickly.
Fortunately, few analysts anticipate significant interest rate increases in 2014.
Despite the risks, most analysts seem to agree that 2014 should be another strong year for healthcare REITs.
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