The healthcare industry has undergone significant transformations, driven by advances in technology, evolving patient needs, and the volatile economic environment. The collapse of major banking institutions such as Silicon Valley Bank earlier this year, as well as rising rates, has had a significant impact on commercial real estate lending.
Many industry professionals are keeping a close eye on the changing lending requirements for new developments and REOs (Real Estate Owned) or lender-owned assets, and the impending wave of loan maturities coming due in the next few years. For healthcare systems or practices looking to expand or open new facilities in the near future, understanding the state of the sector’s lending is key.
How Healthcare Lending Requirements are Shifting
Amid economic uncertainty and continued pandemic recovery, many banks and lenders have shifted their requirements to be more conservative, with more rigorous criteria for borrowers seeking a loan. GlobeSt. reports there has been a 74% year-over-year decrease in the dollar volume of loans for healthcare properties.
One area of note that has changed in the requirements for lending is in pre-leased properties. In previous years, the standard threshold for pre-leasing was 50%. Now, a growing number of lenders are mandating a significantly increased percentage of pre-leasing for new healthcare developments. Another aspect that has changed is the cost to borrow due to the rising interest rates and the reduction of available lenders, as the number of active lenders in U.S. commercial real estate has declined 32%, per PERE.
The Implications of the Changing Requirements
A big implication of this change to preleasing, of course, is securing enough tenants to meet these more stringent standards which could result in a slowdown in new development.
Financial institutions are also responding to the rates that continue to rise. According to a recent New York Times article, “banks are likely to cut back on lending to preserve capital in order to strengthen their balance sheets in anticipation of further Federal Reserve interest rate increases and renewed calls for regulators to get more aggressive in monitoring risk-taking by banks. Any pullback in new lending could affect the start of commercial developments and push the economy closer to a recession.”
Considerations when Securing Financing
Bisnow reports except for a short time at the start of the pandemic, commercial real estate capital is now harder to secure than at any time since the Global Financial Crisis.
In an ever-evolving healthcare landscape, lenders are looking for borrowers who are forward-thinking and adaptable to industry trends. This includes considerations for telehealth integration, technological advancements like AI, and sustainable practices. Demonstrating an awareness of and willingness to adapt to these trends can be a significant factor in securing financing.
Another lending vehicle that is currently being used is credit tenant leases (CTL), which is a lease with a high credit tenant such as a health system that carries sufficient guarantees that lenders consider as reliable as corporate bonds. Health systems that sign these CTLs can often negotiate the ability to acquire ownership of the property if such an agreement is signed.
Healthcare real estate projects inherently come with a level of risk, whether from regulatory changes, shifts in patient demographics, or unforeseen market conditions, and many lenders are now placing a higher emphasis on borrowers’ ability to identify and mitigate these risks.
Lenders may also be more inclined to work with healthcare providers who have a proven track record of successful operations. This includes factors such as patient satisfaction scores, quality of care indicators, and overall reputation within the community.
As the healthcare industry continues to evolve, so do the lending requirements for real estate projects. Healthcare providers seeking financing for their projects must be prepared to showcase their financial stability, industry expertise, and ability to navigate risks.
By aligning themselves with current industry trends and demonstrating a strong track record, health systems, and providers can position themselves for success in the competitive healthcare real estate lending landscape. Working closely with experienced lenders who understand the nuances of the healthcare sector can also be a valuable asset in securing the necessary funding for these critical projects.