Tri-State Healthcare Real Estate Investment Panel: Healthcare Delivery is Changing, but MOB/HCRE Segment is CRE’s ‘Safe Zone’
by Brian Klebash
- Interest rates could move upwards of fifty basis points before they would put upward pressure cap rates
- Interest rates could move upwards of fifty basis points before they would pressure cap rates
- At $4 billion in deals, the healthcare sector is becoming a core sector in the real estate space and should be taken seriously
- There are many opportunities for renovation on some older medical buildings and repositioning them for more modern uses
- Analyzing statistics using available data and evaluating parameters such as competition and population ages, etc. can really create an advantage when seeking a long-term, viable asset
- When a relationship between the developer and the management of the practice is strong, changes come more easily, and loyalty for future development becomes apparent
- Foreign investment is becoming more prominent as healthcare diversifies the portfolio of many foreign investors
- Net lease properties in the $200 million range are seeing 45 percent of the partners from offshore entities with a 60-40 split between China and Korea as major players.
NEW YORK, NY — The Sixth Annual Greater New York Healthcare Real Estate Summit, the region’s full-day informational and networking conference, was held January 31, 2017, at The Yale Club of New York, and featured more than forty speakers offering comprehensive market analysis of the opportunities and challenges in national and Tri-State regional markets. The summit hosted a roundtable to discuss various trends for the medical real estate and medical facilities marketplace in and around the region. This roundtable welcomed Robert Atkins, Principal at Atkins Companies; Benjamin Hatz, Vice President of Acquisitions with ARC Healthcare Trust; Daniel McNulty, Managing Partner at Brookfield Financial; Jon Sajeski, VP Acquisitions of CARTER VALIDUS; Toby Scrivner, Senior Director of Healthcare Real Estate at Stan Johnson Company; and Jonathan Winer, Senior Managing Director and CIO at Seavest. The group was moderated by Victor McConnell, MAI, Director of Real Estate Services at VMG Health.
Moderator Victor McConnell began the discussion by asking Jonathan Winer, Senior Managing Director and CIO at Seavest, to give a high-level overview of the market. Winer addressed the interest rates and how they affect capitalization rates going forward. Winer said that interest rates could move upwards of fifty basis points before they would put upward pressure on capitalization rates. Winer says this should ease investor concerns with ongoing talk of interest rate hikes. Daniel McNulty, Managing Partner at Brookfield Financial, added that compared to other sectors, healthcare is in a safe zone and he continues to believe there will be some downward pressure on capitalization rates for the near term. Benjamin Hatz, Vice President of Acquisitions with ARC Healthcare Trust, also added that the healthcare sector is becoming a core sector in the real estate space and should be taken seriously. He said at $4 billion, the healthcare sector is a real player in the national markets.
Hatz also spoke about capitalization rates and how they might change looking forward. He spoke about the capitalization rates and attributes the stability to the newer developers entering the space. He said that one way his group evaluates deals is by interviewing doctors and exploring their ideas on growth. Doctors who seem promising and have longevity in their practice can help sway a deal regardless of the financials. Winer added that the risk factor of some practices is the threat of regulatory changes that can render a practice unprofitable quickly. He added that the market is continuing to be risk-insensitive, and this may be concerning.
Winer then addressed the ACA repeal and replace rumors in Washington. He admits it is anyone’s guess what replacement will be, but from his standpoint, certain trends are really changing the healthcare industry overall. Robert Atkins, Principal at Atkins Companies, agreed, adding that the larger doctor groups and healthcare systems that represent the future. Atkins also said that there is an opportunity for renovation on some older medical buildings and re-positioning them for more modern uses.
Jon Sajeski, VP Acquisitions of CARTER VALIDUS, said that analyzing statistics using available data and evaluating parameters such as competition and population ages, etc. can create an advantage when seeking a long-term, viable assets. One example he spoke about is the ongoing healthcare needs of the aging population and elderly care. Regardless of reimbursement by insurance companies, or the government, those doctor groups will still be paying rent and the viability of their practice should be predetermined ahead of investment. Winer added that when a hospital is commoditized it becomes a risk that newer players are not equipped to handle profitably. Many investors lose sight of management and focus too much on the medical side of a practice. Winer spoke about how foreign investment also focuses too much on the deal, rather than the overall relationship management has to the specific practice offers when evaluating a hospital. Many of these details arise too late after the investments are made and can become a negative influence on all the participants of the project.
McConnell then asked the group to speak about the differentiators between a medical tenant and other verticals. Hatz pointed out that one big difference is that medical professionals are very focused on the building’s long-term viability itself. One example is a restriction on who exactly can own the building, cutting resale ability while keeping ownership stable and consistent. They also prefer the owners understand the medical practice and have the education needed to comprehend long-term investment in such a practice. Hatz explained that when a relationship between the developer and the management of the practice is strong, changes come more easily and loyalty for future development becomes apparent.
McNulty then spoke about international investors and how the offshore players, excluding Canada, are influencing the market. Foreign investors were relatively shy about the medical space, said McNulty, but just in the last year or so he has seen two of his three deals go to Chinese investors, respectively. This shift is becoming more prominent as healthcare diversifies the portfolio of many foreign institutional investors. Additionally, McNulty said that these investors recognize the importance of having good management in place that understand the medical side of the practice, as well as the balance sheets. This knowledge often affords the investor to pay a premium if all the parameters click.
McNulty also said that he is seeing some net lease properties in the $200 million range courted by 45 percent offshore entities with a 60-40 split between China and Korea. He added that 40 percent are first-time entrants into the market, and are split 50-50 between China and Korea. This is the first time he has seen these offshore groups become aggressive about investment in the medical sector. He added that the liquidity of these projects is directly correlated with the investor’s ability to understand the business side of the practice, as well as the medical side.