The Two Reasons Why Investors Are So Bullish on Medical Office

Investors are always chasing two features in any investment property: durability and duration of income, according to Matt Bear, founder of Bear Real Estate Advisors. Healthcare offers both, and it’s the reason why investors are so bullish on the asset class post pandemic.

Bear is offering insights into the resilience of healthcare investment market at the GlobeSt.com Healthcare conference currently underway, where he is speaking on the Standing Out From the Crowd: The Resilience of Medical Office panel. Shawn Janus, national director of Healthcare at Colliers; Rus Gudnyy, SVP of investments at Montecito Medical Real Estate; and Bettina R. Hunt, SVP of Leasing at Healthcare Management of America, Inc. will join him on the panel.

Bear has found that durability and duration of income have driven investor interest and helped to stabilize the asset class through a downturn. “Durability speaks to credit, in this case the hospital system’s credit and how important the location is to the area. It tends to be a very durable income,” Bear tells GlobeSt.com. “Duration speaks to the length of the lease term, and generally doctors sign 15-year lease terms. Those two factors continue to be the reason why people invest in medical.”

In addition to strong and stable income dynamics, Bear says that the nature of healthcare properties will ensure demand through every economic cycle. “Everyone needs healthcare. We saw even through the pandemic that people showed up to the clinic. It is resilient because, on some level, we are all trying to live longer and live a better quality of life. It is really as simple as that,” he says.

During the pandemic, investors established and new have increased allocations to healthcare properties due to the resiliency of the asset class, and it has driven up pricing. “I think that investor interest in the asset class will hold—but whether pricing holds or not is debatable,” says Bear, adding that interest rates have played a major role in the rapid pricing appreciation of healthcare properties.

If interest rates move up, prices will move down. “The pricing only holds if interest rates stay down. If interest rates go to 4.5% or higher, cap rates will adjust. When there is available debt at low interest rates, pricing will go up,” says Bear.

Thankfully, he doesn’t expect an increase in interest rates anytime soon. “Ultimately, I don’t think that rates will go up significantly,” he says. “I don’t believe the economy can afford sustained increases in interest rates—but that it totally a guess. I think that we are headed for a low-rate environment forever with credit cycles that happen.”