What are the determining factors driving healthcare real estate investment? Will consolidation between larger healthcare systems and smaller providers continue? And what does the capital stack look like for medical office investment? For these answers we went to Avison Young principal Mike Wilson, one of our featured speakers at Bisnow’s 5th Annual Healthcare Real Estate event, 7am June 23, at the Trump International Hotel and Tower.
1. Consolidation Will Continue Avison Young Mike (who's completed over $3B in investment transactions, advising institutional and private equity clients on properties across the US) says a federal judge’s ruling allowing the merger of Advocate Health Care and NorthShore University Health System to proceed points to further consolidation and the need for scale to compete. Mike believes Advocate and other large competitors will continue to be acquisitive in targeting other healthcare systems in the Chicago market. Avison Young Consolidation will have myriad effects on healthcare real estate. Mike says the paradigm of MOBs containing many small independent physician groups is less common. Many of those smaller physician groups have become part of larger systems. Due to this trend, landlords and buyers are looking toward single-tenant multi-specialty buildings with one system taking the whole building or a large chunk of it on long-term leases. With fewer moving parts and better overall credit, cap rates have decreased and buyer pools have increased for facilities like these. Mike says he’s recently brokered several deals that were the product of tenants being acquired by hospital systems, resulting in credit enhancements for the properties.
2. Efficiency Will Drive Development Avison Young This consolidation, along with an increase in the healthcare system’s need to control expenditures and quality of care due to the Affordable Care Act, means healthcare systems have to rethink how they approach their marketplace. Mike says we’re already seeing that with medical groups adopting a retail approach to healthcare, setting up shop closer to where their patients are. He sees continued growth in new development over the coming years. Healthcare delivery and real estate need to be intertwined, and systems and providers are making sure they're implementing economic and delivery of care efficiencies across their footprint to provide quality care and patient experience. These efficiency needs will drive development.
3. REITs Are Scaling Back Avison Young Private healthcare REITs were some of the most aggressive MOB buyers in recent years. Mike says that while some of the private and public REITs may not be as aggressive in the near term, private equity is jumping in to fill that gap. Strong, well-capitalized players like Harrison Street and MBRE Healthcare (with Kayne Anderson) continue to make big splashes while newer entrants—Carlyle Group and USAA, for example—have partnered with operators for core acquisition funds.
Mike says there continues to be more equity pushing its way toward healthcare real estate. While the vehicles to access medical office product exposure may be evolving, whether it’s through private REITs, public REITs, funds, etc., healthcare assets are a long-run, great niche play with recession resistance, strong revenue growth potential and high access to liquidity that make them very attractive and will continue to drive larger capital allocations.