Healthcare Fundamentals 'Strong' As Demand For Services Grow

While increases in operating expenses, and in particular nursing costs, have hit hospitals significantly, the healthcare sector remains strong from a real estate fundamentals standpoint, according to one industry watcher.

“The healthcare services sector, and growth in demand for healthcare services, is uncorrelated with the economy, which is proven out by historical statistics,” says Darryl E. Freling, Managing Principal, MedProperties Realty Advisors LLC and a panelist at this year’s GlobeSt Healthcare conference next week in Scottsdale, Ariz. “Thus, growth in the demand for healthcare real estate will continue to grow, and high inflation has provided landlords the opportunity to push rents and escalations more than in the past decade…Capital demand for healthcare properties has grown considerably in recent years and will continue to do so as other less recession resistant sectors become out of favor.”

Freling says the only big change for the sector has been interest rates, as the cost of borrowing has more than doubled over the past year.

“Solving for the same returns with twice the cost of debt results in lower pricing (and higher cap rates) than that which one have paid for the same asset a year ago,” he says. “If one believes that rates will come down over the next few years (down even 50% of what they’ve increased over the past year), at which point cap rates will decrease commensurately (because of the high capital demand for the sector), then the current market represents a buying opportunity.”

Freling also notes that “sellers are generally falling into to comps,” as there are some market participants out there who don’t need to sell and won’t while others who may need to transact for a variety of reasons and “need and in many cases will come to terms with today’s market reality.”

“There is still in many cases a bid-ask spread even with buyers that fall into this camp, but many will come around once reality catches up with prior expectations,” Freling says.

 Check back soon for more updates from Freling and other panelists at the upcoming GlobeSt Healthcare conference in Scottsdale.