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
| Nov 11, 2010
USGBC certifies more than 1 billion square feet of commercial space
This month, the total footprint of commercial projects certified under the U.S. Green Building Council’s LEED Green Building Rating System surpassed one billion square feet. Another six billion square feet of projects are registered and currently working toward LEED certification around the world. Since 2000, more than 36,000 commercial projects and 38,000 single-family homes have participated in LEED.
| Nov 10, 2010
$700 million plan to restore the National Mall
The National Mall—known as America’s front yard—is being targeted for a massive rehab and restoration that could cost as much as $700 million (it’s estimated that the Mall has $400 million in deferred maintenance alone). A few of the proposed projects: refurbishing the Grant Memorial, replacing the Capitol Reflecting Pool with a smaller pool or fountain, reconstructing the Constitution Gardens lake and constructing a multipurpose visitor center, and replacing the Sylvan Theater near the Washington Monument with a new multipurpose facility.
| Nov 9, 2010
Just how green is that college campus?
The College Sustainability Report Card 2011 evaluated colleges and universities in the U.S. and Canada with the 300 largest endowments—plus 22 others that asked to be included in the GreenReportCard.org study—on nine categories, including climate change, energy use, green building, and investment priorities. More than half (56%) earned a B or better, but 6% got a D. Can you guess which is the greenest of these: UC San Diego, Dickinson College, University of Calgary, and Dartmouth? Hint: The Red Devil has turned green.
| Nov 9, 2010
12 incredible objects being made with 3D printers today
BD+C has reported on how 3D printers are attracting the attention of AEC firms. Now you can see how other creative types are utilizing this fascinating printing technology. Among the printed items: King Tut’s remains, designer shoes, and the world’s smallest Rubik’s Cube.
| Nov 9, 2010
U.S. Army steps up requirements for greening building
Cool roofs, solar water heating, and advanced metering are among energy-efficiency elements that will have to be used in new permanent Army buildings in the U.S. and abroad starting in FY 2013. Designs for new construction and major renovations will incorporate sustainable design and development principles contained in ASHRAE 189.1.
| Nov 9, 2010
Designing a library? Don’t focus on books
How do you design a library when print books are no longer its core business? Turn them into massive study halls. That’s what designers did at the University of Amsterdam, where they transformed the existing 27,000-sf library into a study center—without any visible books. About 2,000 students visit the facility daily and encounter workspaces instead of stacks.
| Nov 9, 2010
Turner Construction report: Green buildings still on the agenda
Green buildings continue to be on the agenda for real estate owners, developers, and corporate owner-occupants, according to the Turner 2010 Green Building Market Barometer. Key findings: Almost 90% of respondents said it was extremely or very likely they would incorporate energy-efficiency improvements in their new construction or renovation project, and 60% expected to incorporate improvements to water efficiency, indoor environmental quality, and green materials.
| Nov 5, 2010
New Millennium’s Gary Heasley on BIM, LEED, and the nonresidential market
Gary Heasley, president of New Millennium Building Systems, Fort Wayne, Ind., and EVP of its parent company, Steel Dynamics, Inc., tells BD+C’s Robert Cassidy about the Steel Joist Manufacturer’s westward expansion, its push to create BIM tools for its products, LEED, and the outlook for the nonresidential construction market.
| Nov 3, 2010
First of three green labs opens at Iowa State University
Designed by ZGF Architects, in association with OPN Architects, the Biorenewable Research Laboratory on the Ames campus of Iowa State University is the first of three projects completed as part of the school’s Biorenewables Complex. The 71,800-sf LEED Gold project is one of three wings that will make up the 210,000-sf complex.
| Nov 3, 2010
Park’s green education center a lesson in sustainability
The new Cantigny Outdoor Education Center, located within the 500-acre Cantigny Park in Wheaton, Ill., earned LEED Silver. Designed by DLA Architects, the 3,100-sf multipurpose center will serve patrons of the park’s golf courses, museums, and display garden, one of the largest such gardens in the Midwest.
