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Healthcare properties trends 2012-2013

BY Beth Young, CCIM, LEED AP and Henry Hagendorf, CCIM, LEED AP Colliers International

Recent healthcare real estate conferences were well attended by investors, operators, brokers, developers and other industry professionals. Many issues were analyzed and discussed by respected members of panels in front of large groups of attendees and in smaller, more focused gatherings. Following are some of the forecasted trends in healthcare real estate for the next 12 months.

ACQUISITIONS AND DISPOSITIONS

Although many REITS and private medical real estate investors plan to sell up to $50MM of their existing portfolio in the next 12 months, expect to see about twice as many investors trying to acquire properties. They believe that premier medical office buildings’ (“MOB”) values are heading up. This should create a very competitive environment for the better properties.

REITS continue to target on-campus medical office buildings; and although private investors also prefer on-campus MOBs, off-campus non-hospital-affiliated healthcare properties are acquired more often by private investors. Both REITS and private investors primarily seek properties under the $50MM price tag. Cash transactions are very common; but bank debt, bond financing, credit-tenant lease financing, and insurance companies are frequent sources of funds for investments. A majority of generally higher-quality buildings owned by REITS have experienced an increase in occupancy during the last year. However, occupancy changes in many class B buildings and off-campus properties were split between increasing and decreasing.

There is much discussion about whether hospitals or healthcare systems will sell any of their real estate assets and if so, what would be the reasons. Many professionals believe it would be to create liquidity and improve balance sheets. But others’ viewpoints included reasons regarding fund growth strategies and market share, timing that includes healthy real estate valuations and low cap rates, and the need to modernize the facilities or upgrade equipment. Another viewpoint is that the healthcare systems plan to improve efficiency by moving away from the more expensive on-campus hospital settings and add facilities in the communities, closer to patients’ homes.

For a buyer to consider purchasing a property when the seller wants a sale-leaseback (turning the seller into a tenant), longterm leases are required. Up to 20 years is preferred, but some investors will consider lease terms as short as ten or fewer years.

Cap rates for on-campus medical office buildings are expected to range from 6% to 8% depending on whether the building is occupied by a single healthcare system or multiple tenants, the strength of tenants’ financials, and the strength of tenants’ credit. The minimum hospital credit rating that most REITs and private investors would usually require for investments is Aor better, and under the right circumstance, BBB- or better.

Building sales where the tenant is a strong healthcare system in an on-campus building produces the lowest cap rate. However, for off-campus investments, single-tenant buildings where the tenant is not a healthcare system typically result in higher cap rates than multi-tenant buildings. (Higher cap rates imply lower sale prices.)

Specialty hospitals including acute-care hospitals, long-term acute-care hospitals, rehab hospitals, and assisted living facilities are expected to sell in the 7% to 9% cap rate range. But some assisted living facilities and many skilled nursing and memory care facilities will probably sell at greater than 11% cap rates.

DEVELOPMENT

Expect more real estate development from healthcare systems in residential submarkets. The preferred medical transaction size typically falls between $10 and $20 million, with the next most likely range being under $10 million. REITS will often look for a minimum initial development yield of 7.5% – 8.5%, and private investors and developers will often forecast a slightly higher initial yield. Most investors expect to hold a property for at least seven years, but many will sell it in three to seven years. Now that the election is over, providing convenient services for consumers at lower prices will be a fast-growing trend. Care will be located in the communities; and smaller, less-costly facilities that are more accessible to the public will become the norm.

Because of this trend toward community based care, expect a decline in the prevalence of on-campus MOBs, including a reduction in the size of hospital facilities. Another factor is that reimbursements are shrinking, so facilities will need to be more efficient.

The obvious trend is to provide care for consumers that is both convenient and affordable. As more doctors abandon private practice to join healthcare systems, MOBs will not be as necessary as in the past. There is a stronger need for basic ambulatory centers and more sophisticated destination ambulatory centers. Conveniently located surgical centers are opening in stronger submarkets of cities.

As the purpose of medical buildings changes over the next few years, there may be some excess medical-office space while “repurposing” is determined. The great news is that consumers should benefit from many of these changes.