Aaron Jodka
Colliers Capital Markets recently sat down with Jordan Selbiger, Vice President, Healthcare Capital Markets | U.S., to discuss opportunities in the healthcare marketplace.
Colliers Capital Markets (CCM): How would you classify the state of healthcare capital markets? Does it vary between medical office, behavioral, or inpatient rehab?
Jordan Selbiger (JS): Healthcare remains a favored real estate asset class and a preferred alternative to traditional office for investors. Many funds with specific allocations for office are pivoting into medical, leading to increased investor demand for the product type. Medical buildings have performed exceptionally well and proven resilient through multiple economic cycles. Investors enjoy high tenant retention rates and steady rent growth, which has accelerated in response to a surge in construction costs.
Inpatient facilities, including rehabilitation and behavioral hospitals, are the next frontier for many healthcare investors, with a substantial emphasis on each location’s operating financials. Still, with many of the same health system relationships overlapping with traditional outpatient medical buildings, more investors are finding these assets attractive investments.
Jordan Selbiger
“Healthcare remains a favored real estate asset class and a preferred alternative to traditional office for investors. Many funds with specific allocations for office are pivoting into medical, leading to increased investor demand for the product type.”
CCM: Where are you seeing the best opportunities?
JS: Core product is priced more favorably today compared to a couple of years ago. One of the most sought-after opportunities in the current market is core deals at “core-plus” returns. Additionally, many value-add investors are focusing their efforts on mark-to-market opportunities instead of larger lease-up scenarios. Historically high retention rates and rent increases are putting upward pressure on rents for second-generation medical spaces, creating more attractive NOI growth opportunities for assets with shorter remaining lease terms.
CCM: Many healthcare providers face rising costs, labor challenges, and revenue shortfalls. How is this impacting their ability to access capital and the investment market?
JS: Rising costs and labor challenges continue to put pressure on margins for healthcare providers. However, heightened demand for services remains, which bodes well for the long-term viability of most practices. We expect more systems and provider groups to explore sale-leasebacks or other monetization efforts. This move would allow groups to access capital to put cash on their balance sheet, reduce long-term debt, or remove the operational burden of owning real estate. The rise in construction costs has limited many providers’ ability to pursue new build-to-suit facilities, putting them at a competitive disadvantage in the battle for market share within their respective geographies.
Jordan Selbiger
“One of the most sought-after opportunities in the current market is core deals at “core-plus” returns…Value-add investors are focusing their efforts on mark-to-market opportunities instead of larger lease-up scenarios.”
CCM: MSCI has reported that medical office volume fell by 61% last year, broadly in line with office overall. Given medical office’s historically more stable occupancies, are investors missing an opportunity?
JS: Volume didn’t fall due to lack of demand but a significant increase in the bid-ask spread, primarily caused by debt market volatility. Sellers’ expectations have since reset, and with more stability in the debt markets, we expect to see transaction volumes begin to rise substantially. In the short term, a lack of supply in the market remains because medical properties continue to perform exceptionally well, which means investors are generally not distressed or motivated to sell.
