Navigating Changing Transaction Activity in the Healthcare Real Estate Market

The healthcare real estate market, a specialized sector combining the intricacies of both the healthcare industry and real estate investments, has demonstrated dynamic shifts over recent periods. Based on the analysis of data reported in our team’s quarterly healthcare transaction report, Pulse on the Market, we compared Q1 2023 to Q1 2024, documenting notable trends that have emerged, as well as reflecting on broader market sentiments and sector-specific changes. Here, we explore these trends and speculate on the underlying factors influencing cap rate variations to identify areas of opportunity for investors.

Key Trends in Healthcare Real Estate Market

Sales Volume and Transaction Count

Between Q1 2023 and Q1 2024, sales volume in the healthcare real estate market declined by almost 18%, from $1.23 billion to $1.01 billion. Similarly, the number of transactions decreased by 18.6%, dropping from 177 to 144. This reduction in both sales volume and transaction count indicates a cooling market or shifting investment strategies among investors​​.

Cap Rates

Overall, healthcare cap rates increased from 6.41% in Q1 2023 to 6.96% in Q1 2024, suggesting higher perceived risk or altered investment expectations. However, a closer look at cap rates by property type reveals a nuanced picture:

• Ambulatory surgery centers (ASCs) saw a decrease from 7.66% to 6.89%
• Dental properties experienced a slight increase from 6.35% to 6.63%
• Dialysis centers saw a minor rise from 6.20% to 6.31%
• Single-tenant medical outpatient buildings (MOBs) had an increase from 7.00% to 7.27%
• Urgent care facilities experienced a significant jump from 5.88% to 6.90%​​

Price and Rent per Square Foot

The price per square foot for various property types showed mixed trends. For instance, ASCs and urgent care facilities saw appreciable increases, whereas multi-tenant MOBs and single-tenant MOBs experienced slight decreases. Meanwhile, rent per square foot also varied, with substantial increases in ASCs and urgent care facilities, indicating robust demand, while multi-tenant MOBs saw a decline​​.

Speculative Assumptions on Cap Rate Decreases

Despite the overall increase in cap rates since year-end 2022, some asset types like ASCs have reported decreasing cap rates. This anomaly can be attributed to several speculative factors.

Investor Confidence in Specific Asset Types

Investors might perceive certain healthcare assets, such as ASCs, as more resilient and less risky compared to others. This perception could stem from the growing demand for outpatient surgical procedures, which are cost-effective and convenient for patients. Additionally, the high cost of new construction can enhance the appeal of an existing asset which offers tenants a cost of occupancy substantially lower than a new facility. As a result, higher investor confidence in these asset types drives down cap rates despite broader market trends.

Operational Performance and Revenue Potential

ASCs and urgent care centers may have demonstrated strong operational performance and revenue potential, attracting more investment. The stability and profitability of these facilities can make them more appealing, leading to a competitive market and subsequently lower cap rates.

Strategic Repositioning and Market Dynamics

Healthcare providers might be strategically repositioning themselves to focus on outpatient care, driven by advancements in medical technology and shifts in patient preferences. This repositioning can lead to increased investment in facilities like ASCs and urgent care centers, reducing cap rates due to heightened demand.

Investment Opportunities in Healthcare Real Estate

Historically, periods of economic disruption or recession have often led to unique investment opportunities. For healthcare real estate investors, several areas merit attention.

Outpatient Care Facilities

The trend towards outpatient care, accelerated by technological advancements and patient preferences for convenience, presents significant opportunities. ASCs, urgent care centers, and other outpatient facilities are likely to continue attracting investment due to their cost-efficiency and growing patient demand.

Adaptive Reuse of Retail Spaces

The decline in traditional retail spaces offers an opportunity for healthcare real estate investors to repurpose these properties. Converting vacant retail spaces into healthcare facilities can provide a cost-effective solution to meet the increasing demand for accessible healthcare services.

Telehealth and Digital Health Infrastructure

The rise of telehealth during the COVID-19 pandemic has created a lasting shift in healthcare delivery. Investing in properties that support telehealth infrastructure, such as digital health hubs and facilities with advanced technological capabilities, can position investors to capitalize on this growing trend.

Senior Living and Long-Term Care

An aging population continues to drive demand for senior living and long-term care facilities. These properties offer stable, long-term investment opportunities, particularly in regions with a high concentration of elderly residents.

A Look to the Future

The healthcare real estate market’s recent trends reflect broader economic conditions and sector-specific shifts. Despite an overall increase in cap rates, certain asset types like ASCs have seen decreases due to investor confidence and strong operational performance. For investors, understanding these dynamics and identifying areas of opportunity, such as outpatient care facilities and adaptive reuse of retail spaces, can provide strategic advantages. By leveraging insights from past market disruptions and focusing on emerging trends, healthcare real estate investors can navigate the complexities of this specialized sector and uncover valuable investment opportunities.

Toby Scrivner is Senior Vice President at Northmarq