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.
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.
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.
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.
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.
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.
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 2012’s 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.
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.
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
| Jan 3, 2012
Gensler: 'The One Firm Firm'
The giant architecture firm succeeds by giving each of its more than 3,000 employees the opportunity for career growth and professional leadership.
| Jan 3, 2012
Rental Renaissance, The Rebirth of the Apartment Market
Across much of the U.S., apartment rents are rising, vacancy rates are falling. In just about every major urban area, new multifamily rental projects and major renovations are coming online. It may be too soon to pronounce the rental market fully recovered, but the trend is promising.
| Dec 29, 2011
OSHA enforcing new fall hazard standards
OSHA is enforcing its new fall protection standards, as evidenced by a recent crackdown in New York.
| Dec 29, 2011
Decision not to fireproof the new World Trade Center Transportation Hub criticized
Some criticized the decision, reasoning that the structure could be a terrorist target.
| Dec 29, 2011
Seismic safety in question at thousands of California public schools
California regulators responsible for enforcing earthquake safety laws have failed to certify more than 16,000 construction projects in California public schools, increasing the risk that some projects may be unsafe, according to a state audit report.
| Dec 29, 2011
GreenWizard offers cloud-based LEED credit management, assessment
The company recently began offering companies the ability to run assessments for design credits, in addition to traditional product-specific LEED credits.
| Dec 27, 2011
Clayco awarded expansion of Washington University Data Center in St. Louis
Once completed, the new building addition will double the size of the data center which houses sophisticated computer networks that store massive amounts of genomic data used to identify the genetic origins of cancer and other diseases.
| Dec 27, 2011
Ground broken for adaptive reuse project
Located on the Garden State Parkway, the master-planned project initially includes the conversion of a 114-year-old, 365,000-square-foot, six-story warehouse building into 361 loft-style apartments, and the creation of a three-level parking facility.
| Dec 27, 2011
Nova completes $60M Clearwater Conference Center
Comprising an entire city block, the 450,000 sq. ft. facility features over 400 meeting rooms, six theaters, a full-service health spa, complete with an indoor running track, and a commercial kitchen that can efficiently accommodate over 1,000 diners
| Dec 27, 2011
BD+C's Under 40 Leadership Summit update
The two-day Under 40 Leadership Summit continued with a Leadership Style interactive presentation; Great Solutions presentations from Under 40 attendees; the Owner’s Perspective panel discussion; and the Blue Ocean Strategy presentation.
