• Americas

Vital Signs: Developers and Investors Weigh in on Healthcare CRE

By Lorie Damon, Managing Director, Healthcare Advisory Practice

Healthcare real estate trends clearly point to increased demand for out-patient and ambulatory centers relative to hospital and other in-patient facilities. A number of factors drive this trend, chief among them Americas’ aging population and technology advances that impact both patient care and back office operations. An effort to lower costs and improve efficiency play a role as well.

In Cushman & Wakefield’s latest Vital Signs publication, we took the temperature  of investors and developers regarding their geography and property-type preferences and their expectations on cap rates and development yields. Respondents included private equity, institutional owners and REITS, along with developers who specialize in healthcare properties.

Ultimately, more, older Americans – 65 million people aged 65 and older by 2025 – means more healthcare jobs, more than 300,000 new jobs in the past year alone. Consequently, that translates into more healthcare development and investment.

In our Vital Signs survey, developers signaled continued optimism for the sector and anticipate strong returns. Most reported development yields on stabilized, on-campus assets with a credit-anchor tenant ranging from 5% to 7% on the low end, to 6% to 8% on the high end. For off-campus assets without a credit-anchor tenant, yields on stabilized developments ranged from 6% to 8% on the low end, to 7% to 9% on the high end.

Near-historic-low vacancy levels are putting upward pressure on rents at the local level and driving development. Asking rents increased from first quarter to second quarter in 14 of the 25 markets covered in our report and from a year ago in 20 markets. Boston, Seattle, Miami, Kansas City and Orlando led the nation in rent growth.

Nearly 90% of survey respondents indicated that the bulk of their development projects are off campus, reflecting a growing trend among health systems to expand ambulatory footprints and bring care closer to patients. For our respondents, the Southeast region was the most popular geography, with 71.3% of respondents indicating that they have projects occurring there. California and the Mid-Atlantic region were less popular, with only 28.7% of respondents reported having current projects in those locales. Development activity was evenly spread among Texas, the Mountain states, the Northwest, Southwest, and Midwest.

Medical office building sales data from Real Capital Analytics (RCA) for trades greater than $10 million reinforces the results found in Cushman & Wakefield’s investor survey. As has been typical in recent years, sale volume in Q1 2018 declined marginally from Q4 2017, but was 26% higher than Q1 2017. Total sale volume was $1.8 billion. Sale volume rebounded in Q2 2018, finishing at $2.4 billion, although it was still well off the record volume encountered in Q2 2017. Price per square foot remains high at $356 after a small early-year dip. The average cap rate holds steady at 6.4%.

Given the significant demand for assets and limited supply of good, quality product, many developers are now electing to trade portions of their portfolios. Several portfolios are now on the market and are expected to close by the end of ‘18. As cap rates continue to compress, expect others to follow suit on sales.

What’s your 2019 prognosis for healthcare CRE?

Read full report here.

Lorie Damon is the Managing Director of the Healthcare Advisory Group at Cushman & Wakefield, providing leadership and promoting best practices in healthcare real estate leasing, management, and transactions across the continuum of healthcare assets.

 

 

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