A combination of factors has allowed the U.S. healthcare real estate sector to stay healthy in the current environment and remain well-positioned for significant growth in the years ahead.
The demand and values of healthcare properties have benefited from a pressing need for more and improved access to patient care, the use of advanced medical technologies, an aging Baby-boomer population, chronic illnesses, and rising mental health issues, among other things. The positive trends are reflected in attractive capitalization rates for various healthcare facilities.
Industry statistics confirm healthcare real estate is in good shape. In a report released by Grand View Research, the nation’s hospital market size, valued at $1.41 billion in 2020, is expected to post a CAGR of 7.7 percent from 2023 to 2030.
Here are a few trends spurring demand for this sector:
Expanding the Supply of Behavioral Health Facilities
Adaptive reuse and ground-up construction projects are helping to reduce a severe shortage of behavioral health facilities nationwide, thanks to more governmental and private funding.
Growing demand for behavioral health hospitals and clinics is fueled by the country’s mental health crisis, which has accelerated during and after the pandemic. Roughly one out of four U.S. adults experienced mental illness in 2021 compared to 17.8 percent a decade ago, according to the Substance Abuse and Mental Health Services Administration.
A case in point: our firm has appraised more behavioral health facility projects within the last three years than during the previous 30 years.
M&A Activity Remains Strong for Healthcare Facilities
Mergers and acquisitions activity in healthcare real estate has been resilient despite headwinds impacting the CRE industry. Deal volume has been buoyed by increasing demand for medical care and a confluence of macroeconomic factors, such as lower inflation and expectations of further Fed easing of interest rates.
Healthcare facilities for an aging population are a critical factor in stoking healthcare M&A activity. This is due to various reasons, including older Americans in need of more and specialized care for chronic illnesses, along with a shortage of professionals to provide geriatric care services. As a result, demand for healthcare properties like medical office buildings, ambulatory surgical centers and senior care communities will continue to flourish. Value-based care and consolidation of medical facilities also are driving M&A deals.
Converting Commercial Buildings into Healthcare Facilities
Developers are increasingly converting older, underutilized and abandoned commercial buildings into healthcare facilities across the country, giving those properties a second lease on life.
Examples include retail spaces in shopping centers, freestanding retail stores, office buildings, hotels and other commercial buildings typically located in high-traffic areas. The transformation results in more convenient and quicker consumer access to healthcare services. For healthcare providers, this building trend can sometimes offer a less-costly alternative to new construction.
One example of healthcare reuse projects is our firm’s recent appraisal of a 321,000-square-foot, Class A office campus in Sacramento, CA. Plans call for the building to be redeveloped as a medical continuing care complex.
Hotel-to-healthcare facility conversions are a striking example of this trend.
During the height of the COVID-19 pandemic, struggling hotels were deemed ideal for healthcare adaptive reuse projects. For example, hotel guest rooms can be repurposed into patient rooms because of the size of the bathroom access. Hotels also typically have large rooms for meetings and events, which can be redesigned for different healthcare spaces. Patients requiring physical rehabilitation can be accommodated by repurposing hotel fitness centers and pools.
Demand for hotel-to-healthcare conversions, however, has cooled somewhat since the end of the pandemic. This is primarily due to the resumption of business and leisure travel, which has bolstered demand for hotel stays.
Outpatient Facilities on the Rise
More hospitals and healthcare systems are projected to expand outpatient facilities to improve convenience and accessibility, as well as improve their operational and financial efficiencies.
The rapid growth of these facilities is partly due to advancements in medical technology allowing patients to undergo certain procedures outside of a hospital setting. This trend is also supported by healthcare insurance plans giving more favorable reimbursement rates to lower-cost healthcare settings.
Strong Healthcare Demand Spurring Sector’s Job Growth
Robust healthcare job growth is crucial to this CRE sector’s bright future. According to the U.S. Bureau of Labor Statistics, healthcare occupations are expected to increase faster than the average for all occupations from 2023 to 2033 in an industry with an estimated two million job vacancies yearly.
Jack Bass II
Jack Bass II is Senior Managing Director of Healthcare Services for BBG Real Estate Services.
