Investor demand and sales transaction volume for healthcare real estate have reached historic heights, according to an analysis of deal velocity in the first half of 2015 conducted by Brown Gibbons Lang & Co., a Cleveland-based investment banking and advisory firm. The details are contained in the firm’s “Healthcare & Life Sciences Insider” report.
Healthcare real estate sales remain at peak levels for the fourth consecutive year, with $11.9 billion in transaction volume for the first half of 2015, including $11.7 billion in the second quarter alone.
By comparison, total transaction volume for all of 2014 was $9.8 billion, up 32 percent from $7.1 billion in 2013. In short, the demand for quality healthcare real estate assets in 2015 “continues unabated,” the report emphasizes.
Who’s buying? Publicly traded real estate investment trusts (REITs) along with non-traded REITs and other institutional investors accounted for 47 percent of transaction volume in the first half of 2015 (see pie chart).
In fact, healthcare is now the largest REIT sector, representing 21 percent of the total universe of REIT capital raised from 2010 to 2014, with $59.3 billion raised by all healthcare REITs.
To put the latest healthcare real estate sales data into perspective, consider that the second-quarter transaction volume of $11.7 billion (47.5 million square feet) outpaced third-quarter 2007 volume of $8.7 billion (38 million square feet), which was widely considered to be the market peak that would never be matched again.
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Of the total transactions for 2014, medical office buildings (MOBs) represented 63 percent of the volume, with the remaining comprised of hospitals and medical facilities, according to Revista, which tracks healthcare property data.
In 2014, the investment sales market for MOBs generated 950 sales transactions totaling $9.8 billion. In the first and second quarters of 2015, the market has already tallied 1,176 transactions totaling approximately $11.9 billion.
Prices and Tenant Demand Rise
The investment sales market for healthcare real estate is fundamentally sound from both a capital markets and an investment demand perspective, creating a market where capitalization rates and transaction volumes are exceeding all historic measures for the asset class, according to Brown Gibbons Lang.
The average capitalization rate in the first half of 2015 was 6.5 percent, the lowest average cap rate for any first-half period since the onset of the recession.
Prices are also up for healthcare real estate, with an average price of $261 per square foot (PSF). This price is a 21 percent increase over the average PSF of $216 for all of 2014, according to Real Capital Analytics’ recent “Trends & Trades” report.
Tenant demand for healthcare real estate is also on the rise, with a vacancy rate for medical office buildings at 10.9 percent in the second quarter.
Since the third quarter of 2009, vacancy rates for medical office space have ranged from 10.9 to 11.8 percent. That compares favorably with the vacancy rates for traditional office space, which have ranged from 13.4 to 15.9 percent. This gap reflects a lower correlation between medical office space and the overall economy than is the case for traditional office space.
The Road Ahead
High deal volume is expected in the second half of 2015 as institutional acquisition groups compete to deploy and leverage a significant amount of equity to fulfill acquisition goals for the year.
Uncertainty arising from healthcare reform remains the largest concern in the industry, according to Brown Gibbons Lang, as there has been an accelerating trend of acquisitions among health systems and physician groups since the passage of the Affordable Care Act in 2009.
As the number of provider transactions continues to rise, so too will the demand for underlying real estate, forecasts the “Healthcare & Life Sciences Insider” report. Rents will be sustainable at maximum fair market value, creating an optimal time for physician-owners of healthcare real estate to monetize their assets by selling to a REIT or other healthcare real estate investor.
— Katie Sloan