Will medical real estate become a promising new investment frontier for healthcare investors? All factors considered, the answer would appear to be yes. There is little question that the healthcare sector is well-primed for expansion — and that provider organizations will need space to grow when it does.
One recent report from Deloitte projected that healthcare spending would rise at a “robust” compound annual growth rate (CAGR) of 5 percent from 2019 to 2023 — a significant leap from the 2.7 percent reported during the 2014-2018 period. Job growth in the sector has reached similar heights; as of the end of 2018, 16.2 million people were employed in the healthcare industry and accounted for 11 percent of all jobs in the U.S. economy. Moreover, the Bureau of Labor Statistics expects that this number will grow as much as 18% by 2026, noting that job growth in the sector is “much faster than average.”
There are several factors behind the healthcare industry’s expansion. Population growth, increasing economic power, and national efforts to grow the public health systems all drive health spending. The burgeoning population of aging Baby Boomers has also contributed to industry expansion; as researchers for Newmark Knight and Frank wrote in their 2019 Healthcare Outlook, “There has been a continued investment in preparing for and serving the aging population for the last decade.”
Deloitte echoes this point, noting that the number of people aged over 65 will likely comprise 11.8 percent of the world’s total population by 2023, and spending on the geriatric care market (i.e., home healthcare, remote patient monitoring, medical expenses, etc.) will top $1.4 trillion by that same year. Because of this, the firm’s researchers note that even on a global scale, “Providing health care to the expanding geriatric demographic is likely a key concern for governments and health systems.”
The need for more high-quality healthcare is apparent. However, the industry cannot increase its offerings without also increasing its real estate footprint. Provider organizations need spaces of all varieties to establish their operations — from medical offices to hospitals to long-term care facilities and senior living. The demand for healthcare real estate has already become apparent via the sector’s sales numbers. According to recent reports, medical building sales in the U.S. reached nearly $10 billion in 2018 — a near 200 percent increase from only four years before.
Ironically, the drive towards medical real estate is a relatively new development. In past decades, the majority of institutional property investors steered clear of medical office buildings, worried that such assets would be too specialized to provide a high-potential investment.
Now, the tables have turned.
“As net-lease investors navigate the uncertainty of retail, the medical office space appears to offer an alternative, with strong, dependable returns that are less susceptible to disruption from e-commerce.” Peter Bauman, a senior vice president with JLL Capital Markets, commented in a recent article. “As long as trends in healthcare continue to point toward longer lifespans and increased care, medical office space will remain critical, and demand will increase.”
That said, not all healthcare real estate varieties are valued equally. In 2019, CBRE Capital reported that surveyed investors’ top three preferred real estate acquisitions were medical office buildings (94 percent), ambulatory surgery centers (69 percent), and inpatient rehabilitation hospitals (27 percent). However, CBRE researchers also noted a few areas of significant growth in other areas — assisted living facilities, for example, saw the largest year-over-year increase with an uptick of 9 percent over 2018. Though assisted living facilities still lag in current investor interest, these findings indicate that senior-focused medical real estate could come to the forefront of the investment sector in upcoming years.
Regardless of the specifics, one point is inarguably clear — medical real estate is an upcoming area of growth, and institutional investors should, at the very least, keep an eye on its development in future years.