CHICAGO—DLA Piper released its “State of the Market Survey” at the firm's 14th Global Real Estate Summit in Chicago on Tuesday, and the majority of the 222 respondents, a diverse group of CEOS, COOs, CFOs and others, felt healthcare and industrial properties were the most attractive for investors. Data centers came in third, with 31% picking that sector as a top prospect. Although multifamily did see a big drop into fourth place due to fears of overbuilding, the results largely matched the last few annual surveys, and the healthcare and industrial sectors seem likely to hold onto the top spots.
“We've got an aging population,” John Sullivan, US chair of the firm's real estate practice, tells GlobeSt.com. And coupled with new developments in technology and treatments, always a feature in the sector, “that will sustain demand for the delivery of healthcare services.”
Jay Epstien, co-chair of DLA Piper's global real estate practice, adds that “regulatory changes in the past few years, especially Obamacare, have fueled the need for more medical office buildings.”
It did so by putting pressure on healthcare providers to provide more services and cut costs. Typically, this means developing outpatient facilities, which can provide services more efficiently, across a wider geographic area. And these properties, which usually have high occupancy and great tenants, have become especially popular with investors.
Epstien adds that Chicago-based Ventas Inc., a major healthcare REIT, has opened the eyes of many investors to the possibilities in the sector. It has put together many quarters of impressive growth, including several high-profile acquisitions, and most analysts say it still has a lot of potential.
Investment in the US medical office sector has increased substantially over the past seven years, according to a recent study by CBRE. Total investment volume in medical office buildings of at least 10,000 square feet rose from just under $4 billion in 2010 to $10.2 billion in 2016. Moreover, total investment in 2016 exceeded the prior annual peak of $7.3 billion in 2006.
Industrial properties will also retain their appeal, Epstien says. The reconstruction of the nation's supply chain, driven by the growing popularity of e-commerce, along with other factors, shows no sign of slowing, and has given investors the opportunity to buy fully-occupied logistics facilities of more than one million square feet. “It's not just the small industrial parks that people were building before e-commerce.”
And it looks like many of those buyers will be from overseas. Almost one third of survey respondents expect foreign investors to be the most active buyers in the US, while 28% chose private equity, and 26% selected pension funds.
Sullivan says some sovereign wealth funds, such as of Norway and China, are so big that major investments in the US, largely seen as the world's most stable market, is pretty much inevitable. Even moves by the Chinese government to curtail the outflow of capital are unlikely to disrupt the pace of buying.
“We're also seeing foreign investors go into secondary cities,” he adds, instead of gateway markets such as New York, Los Angeles and San Francisco, cities where they traditionally felt comfortable.
In doing so, they are following an overall trend in the industry. For the second consecutive year, respondents to the DLA Piper survey said they saw greater opportunity for CRE investment in non-gateway cities than in gateway cities. When asked to rank non-gateway cities, respondents expected Austin and Seattle to perform best, with Denver and Nashville also seen as top investment destinations.
“We've recently seen German investors in Austin, and Chinese investors in Seattle,” Epstien says. And for them, “that's a big leap.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
