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October 24, 2017

Interest in U.S. healthcare real estate is at an all-time high – and it’s not just because of the political talk surrounding healthcare reform. Recognizing that healthcare represents 18 percent of the economy, this “alternative” sector for institutional real estate investors is now on its way to going mainstream.

Consider this: only seven medical office properties priced over $150 million have traded in the last six years, but three of those transactions closed within the last 12 months. What’s more, 2017 marks the first time that two medical office buildings (Baylor Sammons Cancer Center and VA Loma Linda Ambulatory Care Center) sold for more than $200 million – and it occurred in the same year.

And there’s more on the way.

Bentall Kennedy recently announced its intent to sell a massive medical office portfolio that it has carefully built over the last 12 years on behalf of a state pension fund The 17 high-quality medical office buildings in the portfolio total 1.4 million square feet and are on the campuses of highly rated, market-leading and academic health systems in seven states. Industry experts say the portfolio could fetch $600 million.

As investors continue broadening their strategies and seek durable yield, they are increasingly looking to sectors that are positioned for sustained stability. Enter healthcare real estate, where yields are 100 bps wider than in comparable quality traditional investment classes.

“The growing size of outpatient facilities and increasing acceptance by healthcare providers to use investor capital has increased opportunities for institutional investment in the medical office sector,” said Mindy Berman, Managing Director, JLL. “The supply of large-scale, single-asset opportunities is only going to continue as outpatient care expands and investment appetite supports the growth.”

Investors’ appetites are being fed by an industry that has been steadily migrating to lower cost outpatient settings. This is causing a spike in outpatient visits, which are expected to increase by 20 percent over the next decade – and that’s occurring even after the number of outpatient visits has already doubled in the past 20 years. Healthcare spending is projected to grow by more than 5 percent annually and most of that care is occurring in ambulatory settings that are target-rich for investor capital.

Those factors have created bigger investment opportunities. “There is a supply of developments that can be monetized,” said Steve Leathers, Executive Vice President, JLL.

As a class, medical office investment opportunities lagged seniors housing since the availability of significant investor-owned outpatient facilities did not occur until the 2000s. Prior to then, most healthcare services were provided at hospitals. As outpatient services and off-campus facilities grew, third-party capital became more common.

Today, 83 percent of the estimated 35,000 medical buildings valued at approximately $1.3 trillion are owned by health systems or physicians. As the number of healthcare facilities grows to support an aging population, the stock tilts increasingly toward investor ownership, offering valuable new supply.

Investors who are continuing to broaden their strategies and looking to sectors that are positioned for sustained stability are taking notice – both domestically and abroad.

“Historically, there has been institutional and foreign interest in hospitals and medical office product, just not to the scale we’re seeing now,” explained Berman. “This pool of capital hasn’t always been evident as many of these buyers invested via funds of investment managers or in separate accounts.”

The majority of foreign interest in healthcare real estate has come from Canada. Recently, investors from Europe and Asia have become more active. And Berman points to the $2.6 billion in Chinese capital that went into North American health care properties in 2016 as evidence that it’s spreading.

“As foreign pension funds, sovereign wealth funds and life insurance companies become more familiar and comfortable with healthcare, they are finding that medical office buildings are an incredibly attractive option,” said Berman. “For investors who want safe investments but need yield and diversification, medical office is incredibly attractive.”

Read more about this trend in Real Estate Alert.

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Mindy Berman

Managing Director, JLL Capital Markets

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