As many areas of commercial real estate have faced major ups and downs in recent years, the health care asset class has been steadier than most and also has bounced back from the COVID-19 pandemic shutdowns quite well. But the industry continues to face plenty of headwinds, including nursing and physician shortages, and supply chain problems.
Even with such difficulties, health care continues to attract investors and innovation. Shawn Janus, national director of health care services for Colliers, spoke to Scotsman Guide this past June about how the sector is evolving and continuing to show strength during a time of uncertainty.
What is your perspective on health care properties right now?
The health care sector is very bullish. It’s held up very well through the pandemic. In fact, in the last several years, it has outperformed most of the other asset classes, other than industrial and multifamily. The sector is not recession-proof, but it has always been recession-resistant. So, it weathers the ups and downs of the market. I think that’s particularly important, given inflation and what’s happening with interest rates and other macroeconomic issues.
When do you expect medical offices to return to a normal flow of activity?
When COVID struck in March 2020, we definitely saw a downtick in activity like every real estate sector. But we recovered fairly rapidly, and actually I would say 2021 was a very good year for health care real estate. This year has also been a good year, despite the recent economic ripples which have affected folks. Still, I think this downturn will affect health care real estate less than most other asset classes.
What aspect of health care real estate are your clients focusing on this year?
Our clients are on both sides of the equation. We have clients who are health systems, hospitals, as well as physician practice groups. We also have investors, developers and financial players in the space. One of the interesting dynamics happening is on the health care provider side, which has always been a low-margin business.
The sector is not recession-proof, but it has always been recession-resistant.
With inflation and a changing economy, both rental rates and expenses are rising, and providers are experiencing financial pressure. They are evaluating whether to own property or continue renting. Those decisions are based on a number of variables, including their financial condition, their creditworthiness, and whether they have the wherewithal to execute such a capital transaction. Another discussion going on is whether they should negotiate short-term or long-term leases. A key element of that decision is their perspective on the inflationary environment and how long it may last.
Talk about some of the more interesting health care innovations taking place.
I think telehealth (using telecommunications to communicate with a physician, as opposed to visiting a doctor’s office) is a fascinating development. Speaking personally, I think telehealth makes a lot of sense and is more efficient. But the adoption rate of telehealth has been very low.
Before the pandemic, the adoption rate was around 3%. Once the pandemic hit, those numbers surged, and telehealth acceptance was well in excess of 50% and continued to climb. Now it’s come back down, which was expected. The best minds in the industry expect that telehealth will stabilize somewhere in the 13% to 15% range. The growth in telehealth really came because government programs such as Medicaid and Medicare agreed to reimburse telehealth visits at the same level as in-person patient visits. There were other factors as well, including the government relaxing various rules.
What worries you most about the industry going forward?
Health care has benefited from some of the difficulties in the other asset classes — for example, the office and retail sectors. But health care, as I mentioned earlier, has always been relatively stable. So, it will be interesting to see what happens as the other asset classes continue to rebound, and how they deal with inflation, higher interest rates and possibly a recession. Should other asset classes begin to once again look attractive, investors may look at investing in those sectors at the expense of health care real estate assets.
The other interesting factor is capital inflows. There continues to be huge capital formation in health care from investors looking to deploy capital in this sector. For the past five to seven years, there hasn’t been enough product for people looking to invest. Once those supply- demand features come more into balance, I think you will see a leveling of the playing field in the health care sector.
My final commentary is related to government regulations. Health care has always been impacted by the laws and regulations passed in Washington, D.C., and that will continue to be the case. ●
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