Colliers Capital Markets recently sat down with Shawn Janus, National Director | Healthcare, to discuss the current trends in the healthcare market.
Colliers Capital Markets (CCM): How are fundamentals in the healthcare market?
Shawn Janus (SJ): Compared to other asset classes, fundamentals are relatively healthy. Medical office is performing very differently than office in general, with low vacancies and improving rents in recent quarters. The healthcare sector moves at a slow and steady pace, as opposed to the boom-and-bust cycles typical of other asset classes. The need for medical care will never go away, ensuring demand for services and a need for space.
Given the challenges of raising capital through traditional means such as bond financings due to higher interest rates, providers are looking at potentially monetizing their real estate holdings as an alternative. Hospitals and health systems operate on low margins, and redeploying capital into clinical operations has a higher return.
CCM: Demographics point to a sustained long-term demand for the healthcare industry. Which markets are growing?
SJ: It’s a mix. It comes down to demographics such as age, as well as economics. Older adults require more medical services, so there’s an overall increase in demand due to the Baby Boomer generation getting older. At the same time, markets with strong migration patterns and low state taxes, such as Texas, Florida, and Tennessee, are rapidly expanding. Phoenix is one of the fastest-growing healthcare markets in the country.
CCM: Costs and staffing have become headline issues for many healthcare networks and providers. How are those being addressed?
SJ: Costs are a major factor. How we “see” the doctor has changed with the emergence of telehealth. Prior to the pandemic only about 2%–3% of visits were virtual; today that percentage is settling around 11% and the cost for delivering care via telehealth is lower. In addition, providers are looking to deliver care in the traditional setting more efficiently. For example, visiting your primary care doctor and being recommended to an orthopedic surgeon and then a physical therapist, all in the same building. Smaller providers are also being acquired by larger healthcare systems and benefit from efficiencies of scale.
Labor is the issue that keeps executives up at night. There’s a shortage of both nurses and physicians. Nursing is facing burnout. Attracting new nursing professionals is critical, and one way is to recruit internationally and offer bonuses, additional training, and a work/life balance. However the added cost of that labor only puts increased pressure on margins. Artificial intelligence is influencing the industry as well. It is helping with administrative tasks and medical records, but has the potential to do far more.
CCM: How should investors position their acquisition targets in today’s market?
SJ: Investors should look to strong credit occupiers and locations where they can underwrite continued demand and growth. Proximity to the patient or consumer is important, as is an understanding of insurance coverage. Healthcare providers receive higher reimbursements from private-pay insurance than they do from Medicare and Medicaid. Outpatient facilities such as medical office, ambulatory surgery, and imaging are attractive options.