Capital Gets More Expensive for Healthcare CRE But Investors Are As Interested as Ever

On one hand, healthcare real estate is fortunate. There is plenty of capital available for deals.  On the other, that capital is more expensive today, like it is for much of the rest of the commercial real estate world. But because healthcare CRE assets continue to be sought after by investors, deals are still getting done, according to panelists at GlobeSt.com HEALTHCARE real estate event held this week in Scottsdale, AZ. 

Part of that is due to a lack of inventory with more investors, said Colliers Senior Managing Director Kim Kretowcz. At the same time, “private equity money just continues to grow and grow in our sector. So there’s activity, it’s just [a matter of] readjusting the value of that property to meet the current capital cost.” 

That is not to understate the hard numbers underlying such transactions. “Financing and debt is probably the single most significant thing driving the market right now,” said Jonathan Buehner, senior vice president at Capital One Healthcare.

Consider bank financing, which traditionally has fueled most healthcare real estate deals. “To say that we’re in a different world from where we were at the beginning of the year is a vast understatement,” said Sabrina Solomiany, senior managing director and head  of Medical & Life Sciences at Berkadia Commercial Mortgage. And that trend will continue for the foreseeable future. Right now SOFR deals are being underwritten in the 4.2 basis range and the curve suggests deals will be up to 5 by the middle of next year, she said.

Spreads have changed significantly as well, she continued. “At the beginning of the year, we were looking at core assets in the mid-100 basis point range and for core plus in the 200, low-200 range, for value-add in the mid-300 range. All of that has increased by 50-75 basis points at least.”

Obviously, this is a period of significant volatility right now, Ben Ochs, CEO of Anchor Health Properties, said. “A lot of institutions are on the sidelines.

That being said, while there are many lenders tapping the brakes, there’s still a lot of lenders out there who love the space and who are eager to put out capital, Solomiany said. “It just takes a little more digging on our part and bringing the right deals – you have to really underwrite deals accordingly.”.

And when those deals do get to the banker’s desk, they tend to be supportive, Buehner said. Lenders’ perspectives have not changed about healthcare. “The underlying fundamentals are still there. We’ve got strong occupancy trends, high renewal rates, great tenant performance through multiple cycles.” Banks are in the market, in other words. “We’re just being a little more selective and trying to make smart decisions and we navigate a choppy market.” 

Indeed, the sector’s strong fundamentals have been crucial, said Darryl E. Freling, managing principal of MedProperties Realty Advisors. “I’ve been in markets and other sectors where, if you are headed into a recessionary environment, the fundamentals fall apart,”  

The only thing that has changed are the interest rates, he continued. MedProperties is seeing cap rates today on solid assets that haven’t been seen in a decade. “So from our standpoint we view it as a buying opportunity.”