Healthcare Real Estate Continues Strong Performance

Colliers’ analysis of the healthcare industry and its effect on commercial real estate in the U.S. points to a soaring healthcare landscape with expected increases in investment and further “retailization.” In 2016 and beyond, there will continue to be strong demand for medical office space as healthcare spending rises and demand from an aging population grows.

Investor appetite is driven by higher yields compared to other asset classes, low interest rates and a stable tenant base with strong credit. The solid fundamentals of this asset class, combined with the projected aging population growth, are attracting investors not accustomed to investing in medical office buildings. Strong demand should continue into 2016, with the recent interest rate rise having minimal effect.

The retail sector is also expected to benefit as medical clinics, urgent care centers and other outpatient facilities lease space in shopping centers where retailers have left vacancies. There are often favorable lease terms in centers with several vacancies and these centers offer greater visibility and more convenient locations to patients.

We expect healthcare costs will continue to rise as the Affordable Care Act (ACA) has enrolled millions of Americans who are actively using the coverage they are now paying for. This, combined with the projections of growth in the population 65 years and older, leads to the estimate of a near doubling of healthcare spending – from $3 trillion in 2014 to $5.5 in 2024.

As hospitals and healthcare systems are under pressure to reduce costs while increasing the quality of care, there has been a wave of merger and acquisition activity that is expected to continue into 2016. In Philadelphia this is evidenced by the recent merger activity of Jefferson Health System early this year, the acquisition of Crozer-Keystone Health System by Prospect Medical Holdings, Inc., and Prime Healthcare Services’ purchases of Mercy Suburban Hospital in East Norriton and Memorial Hospital in South Jersey. These hospitals and healthcare systems are seeking to improve efficiencies, reduce duplicate facilities and gain greater negotiating leverage with insurance companies.

Key Takeaways

  • Vacancy Rates: Through three quarters of 2015, the vacancy rate stood at 9.5% nationally, a drop of 30 basis points from the prior year.
  • Absorption: While absorption has slowed, it has remained positive in 2015; totalling 5.8 million square feet through the third quarter of 2015.
  • Rent: Average asking rents for medical office buildings were generally flat in 2015, reaching $22.95 per square foot in the third quarter.
  • Sales: At the end of the third quarter of 2015, the rolling 12 month sales volume ($12.9 billion) hit a new peak, which has contributed to downward pressure on cap rates.
  • Technology: Consumers have embraced technology to take a more active role in their care while providing caregivers with crucial information that can lead to more personalized courses of treatment, earlier diagnoses, prevention of unnecessary costs and easier direct communication.
  • Retail Effect: The “retailization” of healthcare has continued to take leaps forward as providers look for lower-costs and locations that are easily accessible to customers.
  • Mergers & Acquisitions: Merger and acquisition activity continued to roll in 2015 as the pressures to cut costs and reduce spending while increasing the quality of care have led physician practices, hospitals and healthcare systems to combine for greater negotiating leverage and improved efficiencies.
  • Financial Health: U.S. health expenditures topped $3 trillion in 2014 and are projected to grow by another 5.3% when the totals for 2015 are finalized.