Healthcare Real Estate Opportunity

The attractive investment environment for healthcare real estate is driven by stable & growing demand, favorable supply conditions, and strong acquisition opportunity.

Healthcare spending is projected to grow 5.75% per annum from $3.1T (17.5% of GDP) in 2014 to $5.4T (19.6% of GDP) by 2024. The growth drivers are healthcare reform, demographics, and innovation. Healthcare reform has expanded insurance coverage by 17MM individuals which will certainly increase services spending. Demographics will fuel spending as Baby Boomers are joining the 65 plus ranks at a rate of 10,000 individuals per day. The over 65 group represented 13% of the population in 2010 and is forecasted to be 20% by 2030. The 65 plus group are the single largest users of healthcare - 60% of a person’s lifetime healthcare expenditures occurs after the age of 65. They average 2.5x the number of annual physician office visits than the rest of the population. The influx of the over 65 population combined with their higher usage rates will generate a substantial increase in healthcare spending. The Millennial demographic with a population equal in size to Baby Boomers will also impact healthcare spending. Millennials are beginning to form households and as their families expand they will increase their healthcare spend. Healthcare employment is projected to grow 21% from 2014 to 2024 (adding an estimated 3.8MM personnel). Increasing healthcare spending & employment will drive significant need for additional Medical Office Building (MOB) capacity for quite some time.

Medical office demand is also driven by the strategic focus on outpatient delivery from healthcare service providers and insurers. They recognize outpatient delivery as a more effective & efficient strategy that leads to lower cost, convenience, and better outcomes. Technology advances will expand this advantage as innovation has and will continue to bring treatment availability to the outpatient setting. Furthermore, healthcare systems look to the outpatient network as feeders to their inpatient facilities.

Healthcare real estate supply suggests a market with substantial acquisition potential. The US market has $1T of healthcare real estate with approximately $315B in medical office. The 2016 year-end MOB vacancy rate of 7.4% signals favorable conditions for rent stability and growth. The low vacancy combined with increasing demand should continue to generate strong acquisition opportunities with attractive investment attributes. There are approximately 51,000 MOB facilities with 1.3B square feet. Public REITs own 17% of MOB’s leaving the majority owned by hospitals, providers, and investors. The need for capital, desire to focus on core competencies, and attractive valuations are compelling reasons for continued dispositions. The moderate level of MOB sales volume also supports an attractive and sustainable acquisition environment. MOB 2016 sales activity was $9.3B representing only 3.0% of the total MOB market.