The Recession-Resistant Case for Healthcare Real Estate

Article originally posted on Globe St. on October 9, 2019

Healthcare is one of the fastest-growing sectors of the US economy, driven by the country’s burgeoning and aging population. Not surprisingly, commercial real estate investors are highly attracted to the healthcare real estate niche and are ready to invest.

But overall growth is not the only reason why, says Ben Ochs, CEO of Anchor Health Properties. “While the niche sector is traditionally recession-resistant, healthcare facilities of investment quality are typically anchored by long-term leases with investment-grade health systems or dominant physician groups, and usually generate higher cash yields than other asset classes.”

Recession-Resistant

As concerns loom about a coming economic downturn, investors know that healthcare real estate niche is traditionally recession-resistant. The sector benefits from triple-net leases and high tenant renewal probabilities associated with “sticky tenancy.”

“The lower risk and stability of returns offered by the sector causes it to be viewed as a safe and attractive place to generate reliable, long-term returns,” explains Ochs. “Further, its “safe status” is one of the factors driving record investor interests in recent years.”

There is also a limited supply of investment opportunities. Marketed transactions with high quality tenancy and real estate fundamentals result in extremely competitive bid processes with several bidders on a single deal. Those dynamics are likely not found as often in out-of-favor sectors such as retail, whose transactions don’t necessarily garner the same attention, Ochs tells GlobeSt.com.

Quality Anchored Systems

Another reason investors are attracted to the healthcare real estate industry is because a lot of healthcare facilities are anchored by investment-grade systems.

“Being anchored by investment-grade systems is an indication of that facility’s financial strength and the tenant’s ability to pay rents,” Ochs says.

Higher Yields

Healthcare real estate typically generates high-cash yields as opposed to other real estate sectors.

“Cash yields are usually higher in healthcare real estate than what an investor would encounter in other assets with lower risk characteristics,” says Ochs. “Healthcare facilities, however, also require a lot of capital investment as construction and operating expenses can be extensive and significant. These costs for healthcare facilities ultimately drive longer term leases, which allows the landlord to recoup a significant part of their capital over the building’s investment period while the tenant can benefit from a lower rent constant.”

Forecasts

With healthcare real estate flourishing, medical office buildings are, by far, the most popular property type within the sector. With this sub-sector more recession-resistant than other property types, investors are attracted to it because of its stability and bright forecasts for ongoing strong performance. In 2018, medical office sales totaled approximately $10.4 billion.

For the long term, investors should be focused on preparing for the trends in the healthcare economy including technological advances plus the growing and aging population. These trends, in the long run, will support future demand for the medical office sector and outpatient care.

“There is a lot of interest from investors to enter the space. I would encourage investors to work with experienced operators to secure the right investments,” concludes Ochs.

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