SCOTTSDALE, AZ—Healthcare has become a key national social and economic issues. It is also a crucial asset class in commercial real estate, especially as demand continues to grow. But to meet that demand, first companies must overcome the challenges in the space. That is according to speakers at the GlobeSt. Healthcare Real Estate Conference.

The event, held Tuesday and Wednesday, brought together roughly 300 people from 35 states around the country. In the conference's morning opening session, John Chang, SVP of research services at Marcus & Millichap Inc., explored the big picture perspective and trends that will impact the healthcare industry for the next five years.

According to Chang, the healthcare sector is drawing a lot of attention and drawing a lot of investors in for a variety of reasons. "When you look at what is happening in healthcare, it is pretty amazing," he said. "When you look at the sector, in the past 10 years, there have been 3.9 million more healthcare jobs added. In addition, vacancy rates are down, among other things."

Strong Demographics

Demographics are one driving force behind these favorable fundamentals, Change continued. Indeed, healthcare demand is all about demographics, he said. "When you look at the aging population over the next five years, we are going to add 11 million people over the age of 65. When you look at 75 plus, it is growing by 6.5 million over the next five years and that is accelerating compared to where we have been."

Furthermore the demand for healthcare services increases as people age, he said. "From the 60s to 70s, you get a 35% lift in how often people need healthcare services. For the last 15 years, that has been steady. Healthcare visits by 65+ age group has doubled over a 25 year span."

Many seniors tend to migrate south and southwest after retirement to such places as Florida, Texas, Phoenix and Las Vegas, he said. More telling for the space, Change also said that places like Chicago, New York, and Detroit are still generating positive growth for seniors. "This is all a good indicator of where the trends are going."

This demand has translated into increased transaction activity—Chang says it is double what they were in the last cycle. "When you look at who is doing the deals…For under $20-million deals, it is driven by private investors and above $20-million are the REITs. There is a changing dynamic in the market. Earlier this year there was a little pull back but in the second half of this year, there has been more momentum."

Growing Challenges

That all said, healthcare is hardly without challenges. The rising cost of services is of considerable concern and could influence demand. Change reported that the cost of healthcare services is rising by about 5% per year as opposed to 2-2.5% core inflation. "The aggressively rising cost is tied to chronic illnesses, rising insurance costs, rising healthcare costs etc." By 2025, he said, healthcare will be about 19% of US GSP.

Another challenge is labor shortage, Change also said. "The pace of employment growth will be a significant element that will begin to be restrained."

Also rent growth for medical office space is very modest and really hasn't popped the way one would think given all the demand rivers. In fact, medical office vacancy has ticked up despite modest construction, Chang said. "A big piece of that is industry consolidation."

According to Chang, many people are moving into healthcare organizations rather than opening private practices. "That consolidation is moving the demand into newer on campus or near hospital campus facilities. We are seeing a big change in the dynamics of the service providers and the medical industry that is shifting what kinds of medical office space is being used. When you look across the country at the different metros, the vacancy rates in the southern states are actually higher because the developers went with the aging population."

Keep checking back with GlobeSt.com for more from the Healthcare Real Estate event.