How Healthcare Cost of Debt Might Shift in 2024

The more specific they get, the harder it is to formulate accurate predictions. So, Colliers National Director of Healthcare, U.S. Shawn Janus looked at the broad and complex issue of cost of debt in healthcare CRE during a conversation with GlobeSt.com.

Cost of debt is critical for all of commercial real estate. “There’s been such a rapid rise of what the Fed’s been doing, which impacts everything across the healthcare market,” Janus says. Hospitals, as one example, frequently issue bonds. They’re getting into a “three-year-cycle squeeze with payers,” where they might not be able to free up enough free cash flow to easily manage the requirements.

The debt problem isn’t just an issue of the Federal Reserve’s rate hikes — which, the Fed has been trying to remind markets, may not be over yet depending on signals from economic data. There have been periods where healthcare and other CRE segments have been able to manage much higher interest rates.

“We need stability in terms of pricing of assets as well,” Janus says. “That’s been an issue because no one knows what the debt piece is like, what you’ll be able to do with rents, what you can capture.”

In general, this has become a bit of a self-reinforcing cycle. Higher rates make structuring transactions more difficult because there is less room for profitability. Fewer transactions happen, undermining price discovery and transparency. The uncertainty maintains overly broad gaps between buyers and sellers, in turn disrupting pricing predictability and adding greater risk, further reducing the number of transactions.

One of the largest impacts has been on the size of transactions. “Big portfolio transactions have pretty much disappeared,” adds Janus. “It’s the small transactions where you see the deals getting done.”

Even then problems arise in development. “We help clients go through a location analysis,” Janus says. “We can solve the real estate side of that, but two problems arise.” One is trying to find debt for the post-development deal.”

And then there’s staffing, which affects costs and constrains whether the numbers for a new facility can work. “The labor cost and labor supply are huge factors,” says Janus. He’s seen a nursing shortage since entering the field nearly 20 years ago. Now there are physician shortages as well. “A lot of physicians are retiring, a lot of ones coming in aren’t interested in owning a business,” he says.

However, Janus does expect that cost of debt will begin to stabilize in 2024, providing surer footing to those in the industry.