Sector seen as "recession-resistant"
CHICAGO - Capital raised by healthcare real estate investment trusts (HCREITs) continues to outpace other REIT categories, due primarily to investor interest in medical office buildings and senior housing, according to data released recently by financial and professional services firm Jones Lang LaSalle.
Based on data compiled by the Healthcare Capital Markets group at Jones Lang LaSalle, the capital raised by HCREITs through mid-year 2012 set a record at more than $7.5 billion, outdoing previous strong record years. This total is more than 65 percent of the $11.3 billion in capital raised by HCREITs in all of 2011 and 80 percent of the $9.2 billion in capital HCREITs raised in all of 2010. Additionally, HCREITs continue to outpace capital raised by REITs in other property classes.
"Investment in healthcare real estate is attractive because of the stability of income compared to property classes that suffered from 2008 to 2010 like commercial office and retail," said Mindy Berman, managing director of the Healthcare Capital Markets group at Jones Lang LaSalle. "Physicians stay in their office space with little turnover and hospitals maintain their facilities and operations regardless of the economy."
Demographics of a growing and aging population will continue to fuel demand for increased healthcare services, which will in turn strengthen HCREITs, said Berman.
"While the delivery of healthcare is becoming more efficient and there will be tremendous pressure in the next decade to rein in the cost of healthcare, real estate will always be essential to the delivery model and will remain a staple for real estate investors seeking a reliable source of income," said Berman.
Healthcare real estate is a "recession-resistant" sector that is showing no signs of slowing down, said Berman.
Steven M. Monroe, managing editor at Norwalk, Conn.-based healthcare data publisher Irving Levin Associates, believes HCREITs are attractive to investors because the sector is "resilient in tough times."
"Even during the Great Recession, seniors housing and care operator occupancy rates only dipped by 400 basis points or so, half of which has already been recovered," said Monroe.
The market attracts investors looking to diversify said Brooks R. Smith, partner and vice-chair of the Real Estate Practice Group at Nashville, Tenn.-based law firm Bradley Arant Boult Cummings LLP.
"Investors - capital sources - seek diversification, and healthcare real estate has matured into its own distinct real estate sector, separate from office and retail, with which healthcare real estate is most closely aligned," said Smith.
Smith expects the sector to remain prosperous, in part due to the continuing trend of physician alignment and the anticipated increase in the number of insured Americans thanks to the Affordable Care Act.
However, he warns of a few possible pitfalls that could stymie growth.
"Because healthcare is so highly regulated, governmental action, or inaction, remains an impediment to stability and investors crave stability," he said. "Healthcare real estate is likewise impacted by increasing levels of regulatory compliance."
Smith also noted the limited appeal the sector has for foreign investors.
"Many medical office buildings are located on hospital campuses, and are thus ground leased ... and with those ground leases underlying the rent structure, foreign investors are loath to take part," he said.