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Bringing Life Back Into Healthcare Real Estate

How Healthy is Healthcare Real Estate?

The term “healthcare properties” can be so broad as to be almost meaningless, including everything from laboratory space to nursing homes. However, most real estate professionals prefer a narrower definition; that is, a building where healthcare is delivered to patients on property. Mostly that includes hospitals, urgent care centers, and medical office buildings.

Across the United States, all were affected by the spread of COVID-19. At the start of the pandemic when the onslaught of stricken Americans overwhelmed emergency medical facilities, necessitating the shutdown of elective surgeries, dental offices, and other ancillary medical practices, healthcare groups came under extreme financial pressure. Then as the country adjusted to a pandemic world, normal healthcare practices eased back into the mainstream.

Healthcare real estate suffering from ill financial situations proved “a short-lived experience,” observes Barbara Johnson, SIOR, first vice president of CBRE in Salt Lake City.

The pandemic certainly did not affect the medical office market near to the extremes of the hotel and office sectors, added Tony Fluhr, SIOR, a senior vice president of NTS Development Company in Louisville, Ky. “Here, the governor shut down elective procedures for a period of time and the hospital systems had significant amount of financial strain dealing with the requirements for staff, including bringing in personal protection equipment. That being said, most of the hospital systems continued to lease new space and renew existing leases during this time.”

Fluhr, who represents 1.5 million square feet of medical office properties in all of the state’s big cities, added, “We did not have one default in our medical office building portfolio, which speaks volumes about the demand that was there and the financial strength of the sector.”

In the time of COVID-19, medical office as an investment suffered no feverish ills, averred Gabriel Silverstein, SIOR, a managing director and chair of institutional capital markets for SVN Angelic in Austin, Texas. “Interest in medical office buildings has remained strong. While the operators within the office buildings have had mixed-experiences dealing with COVID-19 lock-downs and shifts in patient behavior, the investors owning the structures have done well.”

Private equity funds and real estate investment trusts—both traded and non-traded—have stayed in the market. In addition, high-net-worth individuals have remained interested in small- to medium-sized medical offices. Sale/leaseback activity is also stronger than expected as aging doctors—who invested in their own offices—are getting closer to retirement and realize they don’t need to own the properties forever.

None of this includes a larger trend of consolidating physician practices. In the Boston region, the big hospitals have been acquiring primary practices (i.e., pediatrics, internal medicine, etc.) which generates activity for in-hospital specialists, reports Arlon Brown, SIOR, senior vice president for the Parsons Commercial Group in Boston.

Read the full article in the Summer 2021 issue of SIOR Report now!

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