RealShare Healthcare Panelists Expect No Slowdown in Demand

SCOTTSDALE, AZ—Healthcare real estate has become a more widely recognized asset class. In 2017, sales of medical office buildings reached record highs despite uncertainty over healthcare reform, value-based reimbursement and changes to the healthcare delivery setting. According to RealShare Healthcare’s Deal Flow Drivers panel, the demand is there, but the supply is harder to come by.

“An aging population creates additional needs for healthcare services and will continue to increase demand for modern, well-located space for years to come,” said panelists, but one of the biggest concerns in the space, or at least new space, is the rising construction costs, panelists added.

In addition, there has been an increase in large well-diversified portfolio sales as trends continue to support migrating to lower cost outpatient settings. When moderator Stefan Oh, EVP of acquisitions at American Healthcare Investors, asked about demand, all panelists agreed that things are healthy, noting that there is additional capital coming into the healthcare space.

Trisha Talbot, managing director of Newmark Knight Frank, said that while things are healthy, and there are opportunities out there, you might have to accept a bit more risk and be smart. “It is competitive to buy assets today.”

It is more competitive for all the buyers, added Caroline Chiodo, SVP of finance and Healthcare Trust of America. “Unlike five years ago, all product is coming to market.”

The general sophistication of the investing public has gone up, explained Darryl Freling, managing principal of MedProperties Realty Advisors LLC. Freling, who seeks value-add opportunities, also sees tremendous amount of new capital from non-traditional buyers. “That capital demand tends to look for chunkier deals,” he said. “The aggregation strategy is a good opportunity.”

He explained that the additional capital demand has also had a significant effect on pricing. “We have all seen the upward pressure on pricing.” At the end of the day, “we want to be in projects that have durable cash flows,” Freling added, noting that he doesn’t expect to see a diminished demand in the space anytime soon.

There has also been an education process in the medical office space, explained Chiodo. “There is long-term demand for healthcare and everyone within the system needs to lower the cost of healthcare. All the fundamentals are positive, though and there has been a lot of capital raised. Demand is absolutely there and it is more a function of product available.”

Oh pointed out that five years ago, when extra capital was coming into the space, they were just dipping their toe and learn about the industry. Now, according to Tellefson, they are ready to pull the trigger, and, often times, pair up with a medical office investor or developer.

Freling explained that a lot of investors simply focus on medical office as opposed to outpatient facilities, but the growing importance of post-acute facilities and the role they are playing in the continuum of care is growing.

According to Trisha Talbot, a managing director in the Phoenix office of Newmark Knight Frank, acute care hospitals and outpatient care will always be required. “There are patients that require a lot of healthcare services and patients that do not. If a patient uses a lot of healthcare services, most likely cost-effective and convenient access to services will be important. If a patient only needs an annual check-up and urgent care services for the occasion flu, their concerns are different. Healthcare practices to serve both needs and those in between are required. The challenge is how practices are deciding what to offer and what demographic they want to serve.”

Check back in the next few days for more from the RealShare Healthcare event.