Healthcare Transaction Volumes Grow as PE Consolidation Drives Growth
The healthcare real estate sector is stealing the spotlight. Despite a challenging economic environment—which has suppressed commercial real estate investment activity and pushed capital to the sidelines—healthcare investment is gaining momentum. Strong fundamentals combined with increased private equity consolidation has created a perfect storm for the sector.
With these factors fueling the healthcare industry’s growth, healthcare real estate has become one of the safest investment assets in commercial real estate, according to Rahul Chhajed and Michael Moreno, both SVPs and senior directors of healthcare at Matthews Real Estate Investment Services.
Following the Fundamentals
Healthcare real estate has inherently attractive fundamentals, including an aging population—the number of Americans over the age of 65 will increase 47% by 2050—limited healthcare facility supply and increased spending on healthcare.
With a stockpile of real estate investment capital looking for a home, both private and institutional capital have mobilized to take advantage of opportunities in the healthcare space. “Transaction velocities have increased substantially compared to last year. It's primarily just a function of the amount of capital sitting on the sidelines,” says Chhajed.
The money is coming from a combination of retail investors who have realized gains in the stock market and want to invest in real estate assets, 1031 exchange buyers and institutional funds with capital from earlier fundraising still on the sidelines. For that pool of investors, healthcare presents an interesting proposition.
“The secular macro tailwinds have been great for owners of healthcare real estate,” says Chhajed. “The asset class is a little more insulated and recession resistant compared to some other product types. Generally, the tenancy is pretty sticky, and so there is a lot more reliability on the income stream, and preservation of value.”
These fundamentals also create stability, as Moreno notes. “People that are buying healthcare real estate aren’t typically chasing the same return that they may be targeting in other asset classes. They’re used to steady long-term cash flow.”
Private Equity Consolidation Creates More Stability
Private equity consolidation has amplified the stability of the asset class. When a larger group buys a smaller physician practice, for example, the small tenant suddenly has a billion-dollar entity guaranteeing the lease. “That obviously creates value for a buyer, and it creates more of an incentive for investors to want to buy healthcare buildings,” says Moreno. “It can become a safer bet for an investor.”
Beyond confidence in the tenancy, there are significant value benefits. Private equity consolidation has helped to support 25 to 50 basis point cap-rate compression, and that is a trend that will likely continue over the next year. As interest rates come down, investors will see increased opportunities for value creation in healthcare. Both Moreno and Chhajed are optimistic about their outlook for healthcare investment through the end of the year and into 2026.
“We're feeling a bit more bullish and optimistic overall,” says Moreno. “We seeing more deals get done that, candidly, just weren't happening over the past couple years.”
For more insights from Matthews Real Estate Investment Services, click here.
Source: GlobeSt/ALM