By Ben Reinberg, CEO, Alliance Consolidated Group of Cos.
Healthcare real estate has proven to be one of the most resilient asset classes, able to bend but not break in the midst of global economic upheaval. Investors have become keenly aware of this fact, perhaps even more so during the latest downturn brought on by COVID-19.
According to the 2021 U.S. Medical Office Trends report by CBRE, year-over-year investment volume for medical office properties fell 12.7 percent between the fourth quarters of 2019 and 2020. However, that’s far better than the 27.6 percent, 40.2 percent and 42.8 percent declines in investment sales volume that were respectively felt by the multifamily, office and retail sectors. Medical office buildings (MOBs) even beat out the white-hot industrial sector, which saw a 15.9 percent fall in annual investment volume last year.
Ben Reinberg, Alliance Consolidated Group of Cos.
For developers eager to satiate this investor appetite for medical real estate, what is it that experienced buyers and newcomers to the space actually want in a healthcare asset? Ultimately it comes down to three things: location, size and use of space.
Go Where the People Go
“If you build it, they will come” may have worked for Kevin Costner’s cornfield baseball diamond, but the safer bet in commercial real estate is the opposite, to follow the people and go where they go. That’s why developers and investors, particularly those focused on the healthcare sector, typically target high-growth areas. Inbound residents mean more demand for services, which translates to lower vacancy rates and helps mitigate risk.
Due in part to the warm weather and tax-friendly environment, numerous Texas metros have seen their populations soar in recent years. The state’s population grew by more than 4 million people over the past decade, according to recently released data from the U.S. Census Bureau. This places the Lone Star State second only to Utah in terms of percent change in population over that period, though by raw numbers, Texas beat out the next-largest attracter, Florida, by more than 1 million residents.
This is why Alliance Consolidated Group of Cos. owns several assets all over Texas. The firm’s most recent acquisition was a two-building portfolio in the center of the Texas Triangle, comprising properties in College Station and Brenham. The Brenham property was especially attractive as it included a vacant piece of land that is ripe for healthcare development.
Smaller is Better
We have seen an uptick in demand for new single-tenant, single-story properties within the medical real estate sector over the past several years. Many of these properties are being built by physician groups, some of which eventually become tenants following sale-leasebacks.
Not only are single-tenant buildings easier to manage, but they are also highly desirable to tenants that want the ability for their employees and patients to drive up and park right outside the front door. Another consideration unique to healthcare tenants involves privacy mandates under the Health Insurance Portability and Accountability Act (HIPAA). These assets allow providers to better manage the flow of traffic through their space, thus protecting patient confidentiality.
In Texas and other markets, we’ve continued to see small buildings attract big interest from investors in search of properties that lend themselves to absolute net-lease structures. Users that have full control over their spaces are more willing to assume the additional financial obligations that come with an absolute lease and, in doing so, are also more likely to stick around.
Make Room for Telehealth?
Telehealth had little traction in the medical sector prior to 2020. That all changed during the pandemic; however, as the technology was the only way for patients to access certain levels of care. So is this the wave of the future?
While telehealth exploded in use during the early months of the COVID-19 crisis, its limitations were also laid bare. There’s no way to administer a vaccine via Zoom, after all. And the extent to which telehealth services will be covered by Medicare and private insurers post-pandemic remains to be seen.
Many in the industry agree that regardless of whether Congress and the Biden administration decide to permanently waive telehealth restrictions, medical office footprints are unlikely to shrink. Providers still need a space where they can conduct consultations from afar while being mindful of patient privacy. Moreover, if the convenience of telehealth results in a higher number of patients, the need for physical space could increase if virtual consultations lead to in-person follow-ups.
The Ability to Hold is Paramount
Real estate cash flows rise and fall like ski moguls. Pandemic aside, there are numerous market dynamics that impact the profitability of a property.
Successful real estate investors are able to identify assets that can navigate the ups and downs and come out ahead over the long term. Successful developers can make those assets easier to find by incorporating what providers need today and anticipating what patients will want tomorrow, without losing sight of proven design and locational attributes that have stood the test of time.
— Alliance Consolidated Group of Cos. specializes in commercial real estate acquisition, investment, development and transaction structuring.