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Earlier this year, Grubb & Ellis launched its Healthcare REIT II, a non-traded fund that intends to acquire $3.3 billion of medical offices and other health care assets. The launching comes after its first fund targeting these property types acquired 43 facilities at a cost of $1.1 billion. Jeff Hanson, the chairman and chief executive officer of the fund says that investors are looking at assets like this with lower volatility than other sectors of real estate and points to the health care industry as one of the few out there rapidly expanding. He recently spoke with GlobeSt.com about the fund and how health care properties stack up.

GlobeSt.com: Why did you decide to launch the Health Care REIT earlier this year? What was the timing?

Hanson: We had started Healthcare REIT I in mid-2006, and we did a three year IPO on that deal and raised just over $1.2 billion in equity and sent them out self-advised just a few weeks ago. So we timed the process with Health Care REIT II such that we’d work through a plus or minus six or seven month process with the regulatory agencies to get it approved while we were transitioning out from Health Care I. We concluded our advisory agreement with Healthcare I on Sept. 20, and we began raising equity the very next day on Healthcare II.

GlobeSt.com: Are investors finding health care more stable right now due to what’s happening in the economy?

Hanson: Far more stable. In this environment, we all know people have been hurt in just about every sector in the last 18 months. There’s a true flight to quality at every level in terms of investor allocations. It’s a flight to stability, safety, security and preservation of principal, first and foremost. The health care story is perfect for that because that’s precisely what it is from a real estate investment standpoint. And it’s not just Grubb & Ellis’ third-party market research. If you read CB Richard Ellis, Jones Lang LaSalle, Transwestern or Marcus & Millichap, they all say the same thing. Medical and multifamily are the two favorite asset classes. That’s largely because the demographic trends are reshaping the face of this nation are driving the demand. Eighty-six million Baby Boomers are seeing the doctor more often this year than they were this time last year. It’s the single largest component of our country’s gross domestic product. Where this plays out most practically in terms of supply and demand is that over the last 18 months, the country has shed nearly seven million jobs. Health care has actually grown by 600,000 net new jobs over that period. That’s steady and we like it.

GlobeSt.com: What about the argument that the assets don’t provide as much of a rental-rate increase?

Hanson: In today’s environment and any environment, stable, attractive, respectable risk-adjusted returns are desired by certain investors. Where you have such upheaval economically over the last few years, it comes front and center at a much larger allocation than most people’s investments. In health care, if you look at the trends, it’s been 2.5% to 3.5% rent growth year-in and year-out. That’s all the way through the debacle of the late ’80s and early ’90s, through the tech boom and bust. You still have medical chugging away. That’s also been the case over the last two years with the bottom falling out of all the other product sectors in market rents. It’s got 92% overall weighted average occupancy nationally and strong fundamentals.

GlobeSt.com: Does the fragmentation of the sector help you at all?

Hanson: Absolutely. The reality is that 20% of non-health-care-related real estate across the country across product types is 20% to 25% institutionally owned which is substantial. In health care it’s 6% to 8%, so there’s tremendous opportunity for institutional players that know what they’re doing to enter the space and consolidate significant assets and run them much more efficiently than the non-consolidated private ownership today. So we see it as a hotbed of opportunity for the next 30 years.

GlobeSt.com: Does it matter where assets are by region? Are there any hot spots?

Hanson: We have a $6-billion portfolio across product types in 32 states. For our non-health-care-related property we target pretty heavily the southern states and the West, because, if you look at the population growth between now and 2030, literally all of the population growth is taking place in these states. But with health care, population growth is nice in a region, but there are different drivers. It’s the aging population, and what drives us more than geographic preferences is the aging population and the right mixture for health care demand over the next two or three decades. Most importantly, it’s strong health care delivery systems.

GlobeSt.com: What areas do you like then?

Hanson: Philadelphia is a great example. Population wise, it’s been absolutely stagnant for 15 years. There is a building boom going on in central Philly right now that is predominantly driven by health care demand. They haven’t taken into consideration the footprint the way they should have and they made some mistakes they’re correcting, but it’s very interesting to see that. There’s no population growth, yet a big demand for health care. I like Southern California and other core and strong secondary markets. I also like the Pacific Northwest, the Northeast, but we’re also buying in deep secondary markets where there are strong delivery systems, like Lima, OH.

GlobeSt.com: Is there any distress in health care?

Hanson: There may be some level of distress here and there based on individual operators and how they leveraged or required real estate, there’s probably the least level of distress by a long shot in health care than there is in any other sector.

GlobeSt.com: And how does President Obama’s plan impact the sector?

Hanson: What we’ve been preaching for a long time is actually beginning to come to fruition. There is uncertainty, and there are a lot of changes. But we were always preaching that this country is not going to move to 100% socialized medicine. You’re not going to see a Canadian plan. If you look at European countries, they have some level of socialized medicine, but it is not illegal to access private insurance. You’re going to see some hybrid program here in the US. If the Baucus bill is enacted, you’re going to see a tremendous boom in health care, and it’s going to be extremely helpful for health-care-related investors. The numbers they’re batting around right now are about 30 million Americans need to be covered. You’ve got serious supply barriers to get through because of the cost of production and placement for health-care-related real estate. It’s 92% occupied now, and pushing that kind of demand through the system may result in an anomaly type rent growth for the first time in decades.

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