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Healthcare real estate investment trusts hope to buck trend of stalling market

Healthcare REIT's have averaged over $40 million per day in fundraising over the past several months.

Jeff Lagasse, Associate Editor

Real estate investment trusts are hoping to bounce back from a rough, and somewhat puzzling, reversal of fortunes in 2015, though investors are already lining up to support companies dealing in healthcare deals.

Between 2009 and 2014, REITs averaged more than 17 percent returns on investments and returns were negative only in 2013, according to data from the National Association of Real Estate Investment Trusts. But experts are scratching their heads about why the sector actually lost 17.60 percent last year.

John Cobb, a senior advisor with the Healthcare Properties Group at commercial real estate firm Grubb and Ellis, said the sector may be correcting after becoming overvalued during years of strong growth. At the same time, some think the prevailing narrative about long-term growth, supported by demographic trends and the implementation of the Affordable Care Act, is already priced into stock values, which closed out a tough trading year in 2015.

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But according to Cobb, as markets continue to limp along, investors are pumping millions of dollars into healthcare-centric REITs.

One recent estimate is that healthcare REIT's have averaged over $40 million per day in fundraising over the past several months.

[Also: Hospital chains make big money in real estate by unloading properties]

"It's not a bad move for investors," said Cobb. "Medical office buildings are high-quality and well-maintained, the leases are long, and everyone agrees that there will be continued demand for the services the tenants provide."

Additionally, vacancy rates for medical office buildings have averaged about 12 percent nationally since 2009, which is more than 5 percent less than the rate for general offices. To provide a return for investors -- and continue growing and performing -- Cobb said REITs must deploy funds into working assets. So REITs are increasing the demand, and the subsequent velocity, of transactions.

Clint Parker, capital markets specialist for the Healthcare Properties Group, said capitalization rate for medical office buildings are being driven down as buyer competition rises. Citing a panel at a Building Owners and Managers Association conference that convened last year, Parker said recent cap rates have generally ranged from 6 to 8 percent for acquisitions, while for new developments, the rates are about 1 percent higher.  These rates are much lower than current cap rates for other offerings.

"Two years ago, REITs were averaging cap rates in the low 8 percent range on acquisitions, and these numbers rarely went below 7.75 percent," said Parker. "Today, the low 7 percent range is fairly common for premier on-campus medical office buildings."

He also said that the healthcare industry's trend toward consolidation will have an impact on REITs.

[Also: Tracking 2015 mergers and acquisitions]

Accountable care organizations and electronic health record requirements are among two initiatives forcing costs on practitioners, he said. "Meanwhile, reimbursement cuts and payer mix shifts threaten the very revenues needed to cover these costs. When combined, these factors place an extra-heavy burden on small practices."

For many such practices, said Parker, the simple answer is to join with a larger practice group or a hospital -- a trend that has gone on for several years already.

In terms of real estate, Parker claims consolidation will primarily manifest in two ways -- at the business level and the space level. Business-wise, it will require more creative and strategic thinking, with organizations that understand the trends being in a better place to survive.

On the other hand, as practice groups add doctors, their space requirements grow -- and as hospitals and systems buy up practices, they wind up controlling larger percentages of buildings and tend to merge these various small groups into a single, larger or multi-specialty space.

"As the cycle progresses, we'll see more demand for large floor plans of 15,000 to 40,000 square feet from medical office tenants," said Parker.

Medical real estate will also see healthcare facilities that are more varied, said Cobb. Across the country, offices and retail centers are being converted to medical centers. New developments are also going off-campus and implementing new design models. As consumers demand ever more convenience, town center models are developing in which retail, office and high-end medical properties (and sometimes residential) are all merged into the same development.

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"These developments are frequently located in, or abutting, busy population centers," said Cobb. "Future re-use plays an important role in this strategy. Facilities can be be re-purposed according to future demand shifts."

Cobb said that not all commercial real estate teams are created equal, so it's important to work with a team that truly specializes in healthcare.

"There are many excellent teams across the country with a deep understanding of commercial real estate … (but) there are very few real estate teams that have a deep understanding of healthcare's intricacies and cause-and-effect relationships and possess a full grasp of all aspects of the commercial real estate world."

Twitter: @JELagasse