NEWMARK KNIGHT FRANK

HEALTHCARE REAL ESTATE INVESTMENTS – EXPERTISE MATTERS BY NKF PHOENIX TEAM

Healthcare real estate assets are currently in high demand due to their resilience to market fluctuations, the implementation of the Affordable Care Act (ACA) and the increasing age of baby boomers, not to mention that healthcare services are always a necessity. All of these factors can offer an investor stabilized returns. However, many investors believe they can enter the healthcare real estate industry using the same strategies that had proved so successful with other commercial product types. Those of us in the industry, whether as developers, investors or service providers, know that there are in fact significant barriers to entry.

One of the main attractions of healthcare real estate properties for investors, including healthcare real estate investment trusts (whether publicly traded and privately held) are their tenant retention rates. “Eighty percent of medical-related tenants renew their leases versus 60% in traditional office tenancy,” said Al Rabil, CEO of Kayne Anderson Real Estate Advisors (KAREA) in a GlobeSt.com article dated September 11, 2014. KAREA is one of the most active private buyers of healthcare real estate.

A September 13, 2014 article in Healthcare Finance News entitled, “Capital Climate Heats Up,” states that although capital for healthcare real estate investment is loosening up, investors in the healthcare real estate industry, whether as owners or operators, are more likely to receive funds than newcomers. Their experience coupled with the support of the capital markets make healthcare real estate investors better suited to developing new state-of-the-art facilities, purchasing distressed assets and turning properties around from existing cash-strapped owners. Furthermore, only experienced owners and operators of healthcare assets can understand the intricate details and sensitivity required by physician tenants, regulations and a positive and peaceful patient environment.

These investors are eagerly waiting on the sidelines for sellers to put properties on the market and are seeking off-market deals. Together, low cap rates and affordable capital have put healthcare property owners in a great position to sell their assets today. Medical properties in the Phoenix market and to a lesser extent in other markets are typically stabilized with strong credit tenants, are typically stabilized with strong credit tenants, especially as hospitals continue to buy medical practices and assume leases.

Low interest rates are keeping cap rates low, allowing many health healthcare real estate assets to command cap rates in the low 700 basis points to high 600 basis points range. Even assets with vacancy are attractive, since they can be marketed as a “value add” or the cap rates for the occupied versus vacant spaces can be adjusted to come up with a competitive purchase price. A competitive purchase price is likely to come from an investor and owner already familiar with the space and those who can put these parties together. Rabil echoes this concept in the following quote from the aforementioned article:

  • “In both medical office and senior housing, there are significant barriers to entry that make it difficult for owners and developers to get into the space. There are currently 36 states that require a Certificate of Need prior to developing healthcare facilities, which include acute care facilities, ambulatory surgery centers, stand­alone imaging/diagnostic centers, assisted living and skilled nursing facilities, among others.”

  • “In addition, a significant portion of new medical office development projects have long-term ground leases with health systems. For these reasons, it is imperative for owners and developers to have or develop relationships with health systems, physician groups, imaging and diagnostic uses, and other prospective tenants. The healthcare industry is comprised of a closely knit group of participants that require a relationship-based approach to leasing and development.”

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2017 Healthcare Real Estate Outlook