CHICAGO—Harrison Street Real Estate Capital just pulled off the biggest healthcare deal of the year, and Mindy Berman, the managing director of JLL, which brokered the 12-asset, $283 million sale, tells GlobeSt.com that the offering generated greater interest from investors than normally seen, partly due to the growing importance of medical office in general, and partly due to the way the Chicago-based Harrison carefully constructed this specific portfolio. The investors who bought the properties were not disclosed.
“There is an insatiable appetite for healthcare real estate,” she says. “As values among the more traditional sectors like office, industrial and others keeps growing, investors are realizing that medical office buildings offer secure, long-term cash flow and strong credit tenants,” especially properties affiliated with major hospital groups. “I can get returns 100 bps higher from medical office buildings than these other real estate types.”
Investors only began completing significant medical office building transactions in the late 90s, “so it's a very young property type,” she adds. And for years the market has been dominated by REITs that specialize in healthcare properties. But for the Harrison deal and other possible healthcare transactions, institutional investors such as pension funds have now begun showing heightened interest. “So healthcare real estate is going from what we consider a niche market to becoming much more mainstream.”
This portfolio, which Harrison built with capital from its Harrison Street Real Estate Partners III fund, also succeeded in attracting disproportionate interest from investors due to its scale and the way Harrison designed it. Instead of an offering comprised entirely of medical office, the company painstakingly assembled a collection that also included inpatient rehabilitation hospitals and short-term acute care hospitals.
Due to the Affordable Care Act, major hospital systems now consider rehab and acute care centers essential to their operations. Under the ACA, hospitals can be penalized if too many of their patients require readmissions and more treatment. And these smaller facilities can provide sustained, specialized care for several weeks at a lower costs after the main hospitals initially discharge the patients, decreasing the likelihood of readmissions.
“This is an important new trend,” Berman says. “Hospitals now have skin in the game and have aligned their operations with these post-acute facilities.” In addition, these tenants typically sign long-term leases of 15 to 20 years, further “growing investor interest in this property type.”
This portfolio's assets are spread across the country in Florida, Texas, Nevada, Oklahoma, South Carolina, and Indiana. National and regional health systems, hospitals as well as local and regional physician groups occupy 99.6% of the portfolio. Specific properties include Desert Canyon Rehabilitation Hospital, a 50-bed inpatient rehabilitation hospital in Las Vegas and Crane Creek Medical Center in Melbourne, FL.
Berman does not expect see the demand for healthcare real estate moderate in the next few years. However, “85% of healthcare properties are still in the hands of the providers,” and this severely restricts the supply. Although this does boost the prices of the properties that do make it to market, it will also curtail sales. “2012 was the record-breaking year for healthcare real estate. But we could break that record every year if the product was there.”
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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.
