Though news reports and predictions painted a gloomy picture, the U.S. economy actually ended 2013 with a record setting year on Wall Street. The Dow Jones Industrial Average finished up 26.5%, its best return since 1995, and the S&P up nearly 30%, shattering previous records.
(See past articles from CBRE Healthcare)
Momentum continues to build in the housing market with positive trends in pricing, new housing starts, and inventory volume across the country. The U.S. economy added 74,000 jobs in December, as the unemployment rate fell to 6.7%, according to the Bureau of Labor Statistics.Ā
With an improving economy and an unprecedented stimulus from the Federal Reserve continuing through 2014, the macro-economic outlook is good.
Healthcare Reform
Meanwhile, the healthcare industry has been rapidly evolving under the Affordable Care Act (ACA). Healthcare reform has compelled health systems, hospitals and physician groups to rein in sky-high costs while improving the quality of care, often coping with more regulatory requirements and less money.Ā
Changes to reimbursement methods and reductions in healthcare provider compensation combined with an increased demand for healthcare services over the next five years, from an estimated 79 million aging baby boomers and 30 million newly insured patients, is forcing health systems to rethink their approach to balance sheet assets and liabilities, including health care real estate.Ā
As health systems and physician groups change their delivery network, both healthcare service operators and owners of healthcare real estate are repositioning their portfolio requirements based on their growth needs. This has led to the highest medical office sales volume in the healthcare capital markets since 2007.
Healthcare reform incentives are driving consolidation of services in the industry, which has produced a robust mergers and acquisitions environment. As hospitals and healthcare organizations face mounting competitive, regulatory and financial challenges, leadership is seeking ways to capitalize on the increase of privately insured patients and Medicaid expansion while effectively serving the interests of their communities.
Healthcare operators need to diversify and expand their patient base while also becoming more efficient and leaner. This is most effectively achieved through greater economies of scale by merging with other health systems, hospitals, and physician groups, leading to a consolidation in the industry.Ā
Consolidation is taking on two forms that are impacting real estate. First, is a unification of real estate assets as a result of health system mergers and physician employment, which has caused a consolidation of physician practices into fewer facilities that are strategically dispersed throughout the community. The other is consolidation among the hospitals and health systems seeking to concentrate operations in a single Metropolitan Statistical Area (MSA), region or state.
Off-Campus Healthcare
Healthcare investors are monitoring the consolidation trends and strategically aligning themselves through real estate transactions with market dominant hospitals and health systems, specifically those with investment grade credit ratings. Historically, investment in medical office properties revealed an institutional and REIT investor preference for core on-campus properties only.Ā
However, over the past 12-18 months, we have witnessed little difference between core on-campus and core off-campus medical office buildings with meaningful hospital tenancy. This is a direct result of the health system shift to high quality healthcare delivered in outpatient facilities further away from traditional acute-care hospital campuses.
The care delivery network is moving from the busy, compact hospital campuses to off-campus outpatient settings with convenient access where patients live, work and shop. In response to healthcare providers commitment to off-campus destinations located near traditional retail properties and close to residential neighborhoods, investors have modified their investment criteria with a focus on off-campus properties.
The buyer pool for healthcare real estate has steadily increased over the last couple of years as investors continue to realize the inherent stability and higher returns for medical properties when compared to the more competitive multi-family, office, retail, and industrial real estate markets.Ā
Public healthcare REITs have historically dominated the medical office investment market share, but in 2013 the private healthcare REITs and private capital investors took over the top slots. Listed and non-listed U.S. equity REITs (including both Public and Private) raised a total of $76.96 billion of equity and debt in 2013, an amount that surpassed 2012ās prior record of $73.33 billion, according to the National Association of Real Estate Investment Trusts (NAREIT). Nearly $9.3 billion, or roughly 12% was attributed to the Healthcare sector.
Conclusion
We anticipate another active year in healthcare capital markets for 2014. All investors will have stable access to capital and interest rates will likely remain at historic lows.Ā
The favorable macro-economic outlook and consolidation among healthcare providers and continuous modification of the healthcare delivery model will continue to fuel the investment engine for what could be another record year in medical office sales.
Ā
About the authors
Lee Asher (Lee.Asher@cbre.com) and Chris Bodnar (Chris.Bodnar@cbre.com) are both Senior Vice Presidents with CBRE Healthcare Capital Markets Group. For more on CBRE Healthcare, visit www.cbre.com/healthcare.
Related Stories
| Oct 21, 2014
Hartford Hospital plans $150 million expansion for Bone and Joint Institute
The bright-white structures will feature a curvilinear form, mimicking bones and ligament.Ā
| Oct 21, 2014
Norman Foster, Zaha Hadid release plans for resorts in Nanjing and Wuhan, China
Jumeirah Group, a hotel group forming a part of investment group Dubai Holding, has chosen Zaha Hadid and Norman Foster to design two of three of its proposed resorts in Nanjing, Wuhan, and Haikou.
| Oct 21, 2014
Inside LEED v4: The view from the MEP engineering seats
Much of the spirited discussion around LEED v4 has been centered on the Materials & Resources Credit. At least one voice in the wilderness is shouting for greater attention to another huge change in LEED: the shift to ASHRAE 90.1-2010 as the new reference standard for Energy & Atmosphere prerequisites and credits.
| Oct 21, 2014
Perkins Eastman white paper explores state of the senior living industry in the Carolinas
Among the experts interviewed for the white paper, there was a general consensus that the model for continuing-care retirement communities is changing, driven by both the changing consumers and more prevalent global interest on the effects of aging.
| Oct 20, 2014
Singapore Sports Hub claims world's largest free-spanning dome
The retractable roof, which measures a whopping 1,017-feet across, is made from translucent ETFE plastic panels supported with metal rigging that arches over the main pitch.
| Oct 20, 2014
Institute for young innovators breaks ground at the University of Utah
The five-story, 148,000-sf building is designed to function like a student union for entrepreneurs and innovators, with a 20,000-sf āgarageā that will be open for any student to attend events, build prototypes, and launch companies.
| Oct 20, 2014
UK's best new building: Everyman Theatre wins RIBA Stirling Prize 2014
The new Everyman Theatre in Liverpool by Haworth Tompkins has won the coveted RIBA Stirling Prize 2014 for the best building of the year. Now in its 19th year, the RIBA Stirling Prize is the UKās most prestigious architecture prize.Ā
Sponsored | | Oct 19, 2014
The Exploration Tower in Port Canaveral dazzles visitors
With a mission to provide the experience of a lifetime, the Exploration Tower at Port Canaveral, Fla., is designed to inspire, as visitors learn about the history and nature of the port and beyond. SPONSORED CONTENT
Sponsored | | Oct 19, 2014
What to do if your team is in a rut
Another brainstorming session, another slew of tired ideas. How can you push your team to be more creative and bring in new perspectives? SPONSORED CONTENT
| Oct 19, 2014
White House Visitor Center reopens in Washington, D.C.
Designed by SmithGroupJJR and Gallagher & Associates, renovated center shows public its unique role as office, stage, museum, park, and home.