How to Break Down Healthcare Real Estate Barriers

MIAMI—This is definitely a commercial real estate opportunity too big to ignore. As we learned in part one of this series, healthcare real estate shows every sign of growth. But that doesn't mean just anybody and everybody can succeed in this sector.

GlobeSt.com caught up with Al Rabil, CEO of Kayne Anderson Real Estate Advisors (KAREA), one of the most active private buyers of healthcare real estate, to get his thoughts on what makes the sector especially attractive, what he sees as barriers to entry, and how his company keeps a robust pipeline moving in part two of this exclusive series. You can still read part one: A CRE Opportunity Too Big to Ignore.

GlobeSt.com: What makes the healthcare related real estate sector attractive?

Rabil: For senior housing, the rapidly growing population of seniors, wealthier seniors—and their children—increase of life expectancy, as well as turnover are all factors that make the sector very attractive from an investment standpoint. In medical office, high retention rates, incremental lease bumps, and low default rates are big sellers. Eighty percent of medical related tenants renew their leases versus 60% in traditional office tenancy.

Also, very often these offices and surgical centers contain expensive, sometimes large medical equipment that is difficult to move from office to office, so health systems and physicians choose their locations carefully and commit to being there for an extended period of time. Plus, healthcare utilization is minimally correlated to macro economic conditions, which makes it recession resistant.

GlobeSt.com: What are the barriers to entry for healthcare related real estate?

Rabil: In both medical office and senior housing, there are significant barriers to entry that make it difficult for owners and developers to get into the space. There are currently 36 states that require a Certificate of Need prior to developing healthcare facilities, which include acute care facilities, ambulatory surgery centers, stand-alone imaging/diagnostic centers, assisted living and skilled nursing facilities, among others.

In addition, a significant portion of new medical office development projects have long-term ground leases with health systems. For these reasons, it is imperative for owners and developers to have or develop relationships with health systems, physician groups, imaging and diagnostic uses, and other prospective tenants. The healthcare industry is comprised of a closely-knit group of participants that require a relationship-based approach to leasing and development.

GlobeSt.com:How does KAREA keep a robust pipeline of future investment opportunities in a highly fragmented sector?

Rabil: As I mentioned before, the sector is a relationship heavy one so it is critical to have close relationships with hospitals, hospital systems, healthcare systems, physicians groups and so forth. Very often these are off-market deals with larger REITs or companies who want to sell something quietly. We work with partners who have been in the space for a number of years, both on the ownership side and the leasing side; generally, our group gets the first call and often, it's the last call.