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WHAT ARE THE BEST WAYS TO INVEST IN HEALTHCARE REAL ESTATE?
EDUCATION
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Medical office properties, once considered a commercial real estate industry niche, have moved into the spotlight in the wake of the COVID-19 pandemic. Demand for medical offices only experienced a momentary pause before picking right back up again. All the while, rents at medical office properties remained strong.
Now, entering what is hopefully the latter half of the pandemic, rent growth at medical office properties has ticked back up again. In some markets, MOB landlords are reporting double-digit rent growth.
This has caught the attention of real estate investors who may not have otherwise considered healthcare real estate. In today’s article, we look at some of the best ways for individuals to invest in healthcare real estate.
We structure deals so that incentives align. Learn more about why you should invest with Alliance.
It’s safe to say that the COVID-19 pandemic has been the primary challenge facing the healthcare industry for the past two years, but industry experts are optimistic that there is a light at the end of the tunnel. By mid-2022, there is a good chance that COVID will become endemic and it will become a virus that is more easily diagnosed, managed, and treated.
There will still be some challenges facing the healthcare industry. Namely, recruitment and retention of staff will continue to prove difficult in some markets. Enhanced competition from insurance companies, pharmacies, grocery stores, and other retail entities providing primary and virtual care is another concern some healthcare providers have expressed.
As it pertains to real estate, healthcare industry insiders have cited the consolidation of physician space, either via mergers/acquisitions or through the full-employment model with hospitals and health systems, as another trend they are watching closely.
That said, despite these potential challenges, the outlook for the U.S. healthcare industry remains exceptionally strong.
According to the U.S. Bureau of Labor Statistics, employment in healthcare occupations is projected to grow 16 percent between 2020 and 2030, far outpacing the average for all occupations. This equates to roughly 2.6 million new healthcare jobs. This projected growth is largely being driven by the nation’s aging population. As people age, their need for healthcare services generally increases – often, substantially.
This is sure to translate into additional demand for medical office real estate. We are already seeing this play out.
Consulting firm LBMC recently surveyed healthcare companies about their projected capital spending plans in 2022. The survey found that 46.8% of healthcare companies cited acquisition of new MOB sites and/or other healthcare facilities as their top priority heading into this year.
This trend is even more prominent among high-growth healthcare companies, among which 60.9% of companies reported their top capital spending priority to be acquiring health care real estate in 2022.
Finding MOB real estate for sale is easier said than done. MOB properties tend to be purpose-built rather than on spec, as is the case with traditional office buildings. Therefore, the supply of medical office real estate remains rather constrained. This is pushing up both the pricing and asking rents at MOB properties – something that bodes well for investors considering investing in health care real estate.
RELATED: The Medical Office Building Market: Trends Both Past And Present
Anyone who is interested in investing in healthcare real estate has a few ways to go about doing so. The most common ways to invest in medical office buildings are via direct ownership/management, through real estate syndications, real estate funds, or by purchasing shares in real estate investment trusts. Below is an overview of each of these approaches.
Some individuals may decide to purchase a small medical office building outright, either personally or through a joint-venture with family, friends, or business partners. Owning a medical office property is generally easier said than done, especially for someone who has not done so previously.
Medical office buildings have unique characteristics that differentiate them from traditional office properties. There are certain considerations around ADA accessibility, amount and location of parking, common area amenities, building HVAC systems, soundproofing of clinics, and more. Typically, only those who have some familiarity with the healthcare industry will want to directly own and manage medical office properties.
Those who are interested in pursuing this approach can begin their search for medical office real estate by browsing commercial real estate listing sites like CoStar, LoopNet, or CREXi.
LoopNet is helpful in that it has a specific designation for “Health Care” real estate, making the search process relatively easy. Investors can use this search function to identify all available healthcare buildings for sale within a certain radius of their target location. Those who want to refine their search for MOB properties for sale even further can do so by selecting specific facility types, like “hospitals” or “rehabilitation centers” using the “More Filters” link on LoopNet’s search bar.
Another way to find MOB real estate for sale on LoopNet is by searching under the “office” category and then refining the search for “medical office” properties. For whatever reason, some owners will classify their property as “health care” real estate while others will classify their MOB as “office” property so it’s always best to search both ways.
Those looking for a full-service buying experience may want to consider CREXi as an alternative. CREXi also helps investors find medical office real estate for sale but takes the process one step further by allowing them to negotiate deals and complete the transaction entirely through the CREXi platform.
RELATED: The 9 Biggest Mistakes You Can Make When Investing In Medical Office
An alternative way to invest in medical office real estate is do to so through a real estate syndication. A real estate syndication is when a sponsor, usually a person or team with tremendous real estate experience, raises money from limited partners to then invest in a medical office asset.
Syndications allow passive real estate investors to take a hands-off approach to owning and maintaining medical office properties. Instead, the sponsor manages all of the day-to-day tasks. This includes but is not limited to:
Those who invest in a medical office real estate syndication will earn a pro rata share of the cash flow via distributions and upon sale of the property.
Another way to passively invest in medical office real estate is through a fund. Unlike a syndication, which is structured for the sake of investing in a single asset, a medical office real estate fund is generally established for the purpose of investing in many healthcare assets.
Just as a sponsor oversees a syndication, the fund will raise capital to invest alongside a sponsor (who may or may not also be the manager of the fund) and the sponsor will be responsible for overseeing the medical office investments on the limited partners’ behalf.
There are many types of medical office real estate funds. For example, a fund may focus on acquiring core- and core-plus medical office buildings that they intend to renovate, stabilize and hold to generate long-term value and income for their investment partners. Other funds may be more narrowly focused on making value-add improvements to a property and then selling within a three to five-year window.
Some medical office real estate funds are agnostic about where they invest in MOB properties. Others may have specific parameters around geography. For example, some may only invest in Sunbelt cities that are experiencing rapid growth driven largely by retirees.
One drawback to investing in a private equity real estate fund is that the barriers to entry are sometimes too high for individual investors. The minimum investment threshold is often $100,000 or more.
Those looking to invest smaller denominations in medical office real estate may want to consider doing so via an online crowdfunding platform. Platforms like CrowdStreet and RealtyMogul have become increasingly popular in recent years, as investors can usually invest as little as $10,000 into individual real estate deals.
The lower investment minimum is especially attractive to investors looking to mitigate risk by investing smaller denominations in multiple MOB assets. Rather than investing $100,000 with one sponsor, that same person can invest $25,000 in four different MOB properties in four different geographies with four different sponsors (if they so choose).
This also allows people to invest in a variety of healthcare product types, ranging from medical office buildings to assisted living facilities and more. They can also pick and choose investments based on their risk tolerance, such as a value-add investment vs. the ground-up development of a new medical office complex.
A Delaware Statutory Trust, or DST, is a commonly used structure for accredited investors looking to fractionally invest in healthcare real estate. There are many DSTs established specifically to invest in medical office property.
The primary draw to investing in a DST is that they have been deemed “1031 exchange eligible” by the IRS. In other words, someone looking to sell their personally-owned commercial real estate can defer paying capital gains taxes if they roll the proceeds into a DST using a 1031 exchange.
This allows an individual to go from being an active real estate investor to a passive real estate investor, as DSTs are managed by a sponsor who oversees the real estate on the owners’ behalf.
Medical office real estate investment trusts (REITs) are another way for investors to add medical offices to their portfolios. REITs are companies established for the purpose of acquiring and managing commercial real estate. The company is managed by a sophisticated team of real estate professionals who oversees a portfolio of assets on investors’ behalf.
The key difference between investing in a REIT and a syndication, fund or other passive real estate vehicle is that when someone invests in a REIT, they are purchasing shares of the company that owns the real estate. They are not investing in that real estate directly.
Therefore, many of the benefits that come with direct ownership of medical office properties (e.g., depreciation) will not apply.
However, a benefit to owning shares of a medical office REIT is that these shares are easily purchased and sold – even on a daily basis. This is a great way for investors to gain exposure to medical office property while preserving liquidity.
RELATED: 5 Important Things To Know About Medical Office Building Investments
Medical office ETFs are essentially a hybrid of private equity and REITs. These funds invest in a combination of REITs and other health care assets.
The Janus Henderson Long-Term Care ETF was a popular example of a medical office ETF, however this ETF closed in 2021 and is no longer actively traded. While it was active from 2016-2021, the ETF invested in long-term care facilities catering to the nation’s aging population including, but not limited to, senior living facilities, nursing services, and specialty hospitals.
Sometimes, ETFs will only devote a portion of their investments to healthcare-related assets.
For example, the Global X Longevity Thematic ETF is not specifically focused on healthcare investments, but it does allocate more than 8% of its portfolio to healthcare REITs.
According to the company, LNGR “seeks to invest in companies positioned to serve the world’s growing senior population through exposure to health care, pharmaceuticals, senior living facilities and other sectors that contribute to increasing lifespans and extending quality of life in advanced age.”
Demographic trends make it hard to ignore medical office real estate investments. The oldest portions of our population are growing at a rate that is four times higher than the national average, and they are consuming healthcare services at an ever-increasing rate. Continued growth in life expectancies is projected to compound this positive demand impact.
These long-term demographic characteristics, combined with favorable supply and demand characteristics, create superior risk-adjusted returns for the medical office industry. Further, the confluence of capital, growing consumer demand, and advancements in medical technologies will only add more fuel to the sector – in turn, causing the sector to grow and appreciate more rapidly than other commercial real estate industries.
If you’re interested in investing in medical office real estate, contact us today!
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