Medical office proved itself to be a more stable asset class than other property types in the recent downturn. Medical office occupancy stayed at much higher levels since hospitals, doctors and practice groups have a high tendency to stay in place. Healthcare isn’t recession proof, but it demonstrated its recession resistance. Investors looking for stable, predictable income like the characteristics of healthcare real estate. Plus, a high percentage of occupancy is tied to highly rated, investment-grade hospitals.
Think about how long the doctors you and your family go to have been in the same place! Factors that drive continuity in healthcare occupancy are the significant investment in infrastructure for medical office and clinical space, and the synergies gained from locating in dedicated medical office buildings and in medical clusters close to hospitals. Healthcare is local and demand for services is pretty continuous, no matter what community you’re in.
Yes. Demographics are the biggest single driver of demand for healthcare facilities. The population of this country keeps growing, especially in sunbelt states, and we’re getting older overall. These are the basic ingredients driving the need for hospital beds and outpatient services. By some estimates, as many as 180,000 new hospital beds will need to be built in just six states in the next 20 years—this translates into a new 175-bed hospital every week, a fairly standard size for a new facility. Healthcare is also going through rapid consolidation both between hospital systems and with physician group acquisitions. The expansion of insurance coverage under healthcare reform in 2014 is expected to add 32 million covered individuals, a boon to demand as well as financial support for healthcare providers. These factors, along with the rapid advances in healthcare technology, are driving the need for new and more technologically advanced space.
There has been a huge amount of capital raised for healthcare in the last two years. Healthcare REITs, for example, have raised a disproportionate amount of debt and equity capital relative to other property sectors—a total of $20 billion in the last 18 months. Healthcare, along with multifamily and self-storage, outperformed every other REIT class in this time period. Medical office has come into its own as a mature property sector with many investors viewing healthcare as core as opposed to “niche” or “value add” in the past. Healthcare is primed for investors looking for stable income, as it feeds directly into what lenders are looking for in terms of income, occupancy and tenant strength.
There is growing alignment between hospitals and physicians, which translates to more direct physician employment by highly rated systems and co-location at hospital facilities. Procedures are moving rapidly to outpatient facilities since it is a substantially lower cost setting than a hospital facility, a move being propelled by reimbursement pressure. Advances in technology are supporting this movement to lower acuity settings. Physician practices are growing in size leading to larger suite sizes. Factors like these are transforming the character of healthcare real estate as it takes on a more institutional scale and character.
There are many new investors attracted to this asset class because of its stable qualities. New investors frequently align with established players in healthcare to gain knowledge. This is critical because the factors that drive success in a highly regulated sector like healthcare are quite different than other property types. Working with hospital and physician tenants is a whole different animal. Plus, the cost basis for healthcare real estate is greater than general office, so understanding the requirements for investment success is more critical. Healthcare reform and reimbursement pressures mean that investors need to be well informed about factors that will drive success with their building tenants in what will be a period of significant change ahead.