What can you tell me about current market dynamics impacting the healthcare real estate market?
We’ve seen rising interest rates and cap rate expansion this year, and as a result, there’s been a noticeable decrease in transaction volume within the healthcare real estate market. This trend is a direct reflection of the cautious approach being taken by investors right now, and many are recalibrating their investment strategies to align with evolving market conditions. All-cash buyers, however, have surfaced as potential beneficiaries, leveraging reduced prices and favorable rates to their advantage. This investor group is becoming more and more active in today’s market with the reduced competition.
Who are the most active investor groups for healthcare assets right now?
Following the pandemic, our team has identified a transformation in the profile of healthcare real estate buyers. Notably, there has been a decrease in sales volume across all investor categories, especially as of late. But despite REITs and institutional investors temporarily reducing their acquisition activities, private buyers – including those all-cash buyers I mentioned before – have really emerged as influential players in the market. Their preference for all-cash transactions and access to diverse capital sources has propelled private buyer activity. The healthcare real estate sector continues to be attractive due to attributes such as high acuity, resilience against economic downturns, and indispensable importance. Despite the recent uptick in interest rates, we continue to see low cap rates, although they are trending upward, but net lease investors across nearly all categories remain active in the market.
Do you consider healthcare to be a resilient asset class, or is it more susceptible than others to market uncertainty?
Certain property types within the healthcare sector have demonstrated remarkable resilience by sustaining lower cap rates. Urgent care facilities and dental properties come to mind, among others. This steadfastness can be attributed to factors like long-term leases, robust credit tenants, and the indispensable nature of these healthcare facilities, which make them really attractive to investors seeking stability and consistent returns. Medical office greatly depends on foot traffic and synergies for sales volume, and often cost twice as much as traditional office space to build. Therefore, we see healthcare tenants become heavily reliant on the stickiness of the location and buildout of the building.
Are there any trends you and your team are keeping a close eye on these days?
We’ve been tracking data that shows a consistent upward trend in cap rates across nearly all healthcare asset classes over the last few quarters. This rise in cap rates can largely be attributed to mounting interest rates, which directly affect the cost of capital for investors. Dental properties currently shine with a noteworthy four-basis-point compression year-over-year, while dialysis properties experienced a significant spike in cap rate expansion of 135 basis points year-over-year. With those property types on either end of the spectrum, most other healthcare assets are reporting cap rate increases ranging from 42 to 145 basis points year-over-year. This disparity reflects robust demand and a heightened investor confidence.
We’re also watching price per square foot values across the healthcare sector, and we’ve seen some slight fluctuations. Recently sold dialysis facilities, for example, now have an average price per square foot of $146. This lower-than-average figure can be attributed to older properties transacting, which tend to have lower price per square foot values compared to newer construction. However, a deeper dive into this data reveals that rising cap rates across healthcare assets are also contributing to these price per square foot fluctuations.
What’s one piece of advice you’re sharing with clients who may be new to the healthcare asset class?
The data I’ve been sharing underscores the pivotal role of diversification in healthcare real estate investments. I advise investors to meticulously evaluate factors such as tenant creditworthiness, lease durations, and geographical diversity when constructing their portfolios or evaluating new acquisitions. Diversifying across asset classes, as well as within a single asset class like healthcare, serves as a risk mitigation strategy and positions investors to seize opportunities.
Can you share any predictions for the remainder of 2023 and beyond?
Based on the data we’re already tracking, a highly plausible projection is the potential increase in cap rates in light of forecasts from the Federal Reserve and the prevailing political landscape. As such, we’re advising investors to vigilantly monitor interest rate fluctuations, their impact on property valuations, and how those both impact investment strategies. Engaging a seasoned real estate advisory is pivotal for staying informed about real estate news, demographic shifts, and pricing dynamics, as well as obtaining access to off-market listings, which can facilitate well-informed and timely decision making in what’s become a rapidly evolving environment. We’re also hoping to see the buyer-seller gap in pricing expectations converge in mid-2024, which could lead to an increase in transaction volume next year and beyond.
Pricing Fluctuations Underscore the Dynamic Nature of the Healthcare Market
As Mr. Anderson noted, changes in interest rates and cap rates continue to exert influence on healthcare property values as we approach year-end. Diversification, coupled with an understanding of each property's unique attributes, are key to constructing a robust healthcare real estate portfolio. Looking ahead, we expect all-cash buyers to remain significantly influential as a buyer group, and despite recent declines in transaction volume, sellers can rest assured that their healthcare assets remain in high demand.