COVID-19 continues to ail traders in most sorts of business actual property. However lots of those who personal healthcare properties are feeling good.
Whereas the pandemic jacks up emptiness, hampers property values and raises important questions on the way forward for the retail and hospitality and conventional workplace sectors, medical workplace buildings have been largely freed from these financial signs.
Properties are buying and selling at costs just like or greater than these paid earlier than the disaster started, hire collections have barely felt a pinch and new sources of capital are in search of a method in. Even the specter of extra sufferers receiving medical care nearly and eroding among the want for in-person remedy hasn’t scared off actual property traders, that are betting closely that the coronavirus will as a substitute speed up the traits which have made medical workplaces extra common lately.
It is a sign that healthcare actual property, fueled by a worldwide well being disaster, is poised to develop from a distinct segment, defensive wager for traders spooked by a downturn into a classy choose. And the Chicago space might be a giant goal market with a number of massive well being programs transferring rapidly to increase their outpatient footprints.
“This pandemic has solely elevated the necessity for the kind of amenities we purchase and function,” says Peter Westmeyer, CEO of Chicago-based Treatment Medical Properties, whose agency has greater than 20 million sq. toes of properties in its portfolio.
Buildings that home medical practices began drawing way more traders over the previous decade for a number of causes. One is demographic: By 2030, there can be 30 million extra individuals age 65 and over nationwide than there have been in 2012, in keeping with an estimate from the U.S. Census Bureau, driving unprecedented demand for healthcare. Main well being programs, in the meantime, have been pushing extra companies into outpatient amenities due to advances in know-how and new cost fashions, boosting the marketplace for buildings with the infrastructure to deal with medical testing and lab work.
Hospital programs have additionally been consolidating and buying extra unbiased doctor teams, making large well being programs—which usually include a excessive stage of credit score—the anchor tenants of workplace buildings as a substitute of small non-public practices. Seventy-one % of all medical workplace constructing tasks that broke floor final yr had been affiliated with hospitals, up from a median of round 60% throughout the last few years, in keeping with healthcare actual property analysis agency Revista.
Regionally, rising chains together with Amita Well being and NorthShore College HealthSystem, in addition to educational hospitals like Rush College Medical Heart, have invested closely in outpatient care each on and off their campuses.
All of that helps clarify why gross sales of medical workplace buildings greater than doubled between 2012 and 2017 to $14.7 billion, and why annual quantity has remained above $13 billion since then, in keeping with a July report from brokerage Jones Lang LaSalle. And extra money is pouring in: In 2019, devoted medical workplace constructing actual property funds raised practically $7.four billion in capital, 47% greater than they did the yr earlier than, in keeping with monetary information monitoring firm Preqin.
DEAL VOLUME FALLS
The coronavirus threatened to derail that momentum, with deal quantity falling in the course of the second quarter to its lowest mark for that interval since 2014, in keeping with information from actual property funding banking agency Hammond Hanlon Camp. Telemedicine turned the norm for sufferers throughout these months, elevating questions on how a lot in-person care it will change completely. A Might report from consulting agency McKinsey projected that $250 billion—or 20%—of all spending on healthcare in the US might be completed nearly within the wake of the pandemic.
However it hasn’t taken lengthy for actual property traders to recover from these considerations. Whereas property values for workplaces nationwide had been down barely yr over yr nationwide in July and August, medical workplace constructing property values had been up by 1%, in keeping with information from analysis agency Actual Capital Analytics.
Matt Campbell, founding father of Chicago-based healthcare actual property developer MedProperties Group, says the emergence of mainstream digital care “might be the primary actual aggressive ingredient that is come into our world within the final 20 years,” but it surely’s unclear whether or not it is going to considerably gradual the highly effective forces driving demand.
“We’re as stunned as anyone at how robust the demand is, pushing during the pandemic. It has been stunning,” says Campbell, whose firm not too long ago broke floor in Buffalo Grove on an outpatient facility leased to Northwest Neighborhood Healthcare and is planning one other medical workplace constructing in downtown Park Ridge.
Campbell is so bullish about demand persevering with to soar that MedProperties is now looking for permits to construct a seven-story, 78,000-square-foot medical workplace constructing subsequent to Oakbrook Heart mall on hypothesis, or with none tenants signed. The agency landed an fairness accomplice to fund the mission, which can be half of a bigger $500 million redevelopment of the previous McDonald’s Plaza workplace property.
“It comes all the way down to what’s the lowest-cost method to offer care,” he says, and “hospitals are going to proceed to push extra of the easier, easy care they’re offering to medical (workplace) campuses.”
There are nonetheless headwinds dealing with healthcare property landlords past the rise of telemedicine. Whereas hospital programs consolidating and snapping up non-public practices helps, it additionally results in redundancy of outpatient areas in a given neighborhood, which means some leases will not be renewed. Main retail pharmacies akin to CVS and Walgreens Boots Alliance are additionally including extra medical area to serve their communities, posing extra competitors for sure companies.
Plus, not all well being system tenants are successful bets. Some are being stretched to the monetary brink by low reimbursement charges from insurers, one purpose cited by each Westlake Hospital in Melrose Park and MetroSouth Medical Heart in Blue Island when shuttering final fall. The American Hospital Affiliation estimated in a latest report that hospitals nationwide suffered “catastrophic monetary challenges” between the start of March and the tip of June, collectively lacking out on $50 billion in income per thirty days.
However that misery might additionally assist medical workplace landlords as hospitals—which personal greater than half of all medical workplace buildings nationwide, in keeping with Revista—flip to promoting and leasing again actual property to fortify their steadiness sheets.
In a single latest deal, Chicago-based sale-leaseback specialist Oak Avenue Actual Property Capital, which is greatest recognized for purchasing retail and industrial properties which can be rented again to the sellers, paid $204 million for a 23-building portfolio of medical workplaces leased again to West Studying, Pa.-based hospital system Tower Well being.
Many hospital programs have bought outpatient buildings lately to generate money, says Oak Avenue co-founder Marc Zahr, however in the course of the COVID-19 disaster, “those that had traditionally had a stronger view about not doing so have began to discover it.”
“Is medical actual property proof against COVID?” initially appeared in Crain’s Chicago Enterprise.