How Healthy is the CRE Healthcare Market?

The healthcare segment of the real estate industry took on greater challenges during the pandemic when hospitals and medical offices and their staffs were inundated with patients, and field tents had to be erected in many markets to cope with the tremendous overflow. 

But now that life has moved back to a more even keel, Colliers Capital Markets and writer Aaron Jodka took a look to see how it’s performing and what trends pose continued and new demands. Historically, the healthcare sector moves at a slow and steady pace versus the more volatile cycles occurring in other asset classes. And that’s primarily because demand for medical care never disappears.

That said, after the three-plus rough pandemic years, its fundamentals are now described as relatively healthy, according to Shawn Janus, National Director, HealthCare. And one part of the sector—medical offices—have low vacancies and improved rents in recent quarters, different from other real estate assets.

But it differs in other ways, including how it raises capital. Because of the difficulty of doing so through bond financings due to higher interest rates, providers are looking at possibly monetizing their real estate holdings as an alternative. “Hospitals and health systems operate on low margins, and redeploying capital into clinical operations has a higher return,” Janus said.

Where the sector is expected to see sustained long-term demand hinges on mostly demographics of age and economics. The older adult cohort of 65 years and up continues to grow and is expected to double from its current 46 million to more than 98 million by 2060, according to U.S. Census Bureau data. These older adults generally require more medical services. But markets where people have migrated of late, often because of better weather and lower state taxes, also spur demand for more care and for all ages, not just the elderly. Janus puts Texas, Florida and Tennessee in this expanding group, plus Phoenix in Arizona since it’s become one of the fast-growing healthcare markets in the country.

Two additional challenges this sector faces come from changes in billing and shortages in staffing. Costs charged may be different at times, in part because of the rise of virtual telehealth, which now represents 11% of visits versus the pre-pandemic number of 2% to 3%. The virtual visits are generally billed out for less. Also affecting billing is that doctors visited in person may be in the same facility rather than in scattered individual offices, which can affect price. Also, larger healthcare systems are acquiring smaller providers, and the bigger ones operate with greater efficiencies of scale, which may also affect charges.

The second big challenge is the availability of healthcare providers, including both nurses and physicians, and both are finding shortages and possible burnout. “Attracting new nursing professionals is critical,” Janus said. And solutions may be to reach out internationally and offer bonuses, additional training and a work/life balance. But, of course, such perks can lead to more pressure on the systems and cut into margins.

On the bright side is the use of the growing arsenal of artificial intelligence, which can help replace some human tasks such as administrative work and medical record keeping, Janus said.

Also, acquisition targets should be carefully assessed. Janus suggests strong credit occupiers and locations that present continued demand and growth because of proximity to patients or consumers. The type of insurance coverage offered also makes a difference. “Healthcare providers receive higher reimbursement from private-pay insurance than they do from Medicare and Medicaid,” Janus said. “Outpatient facilities such as medical offices, ambulatory surgery centers and imaging centers are attractive options.”