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4/07/08
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Investors, developers and other industry pros trying to gauge changing trends in real estate over the coming years can expect aging baby boomers and their increasing demand for medical services to fuel demand for healthcare properties over the next decade, according to a research report just released by Grubb & Ellis. The report, which was authored by Robert Bach, G&E’s Chief Economist, says that medical properties are positioned to outperform other property types over the next 10 years.
Medical office space is already outpacing traditional office space as measured by asking rental rates. From 2000 to 2007, asking rental rates for medical office space grew an average of 2.8 percent per year on average, while rents for traditional office product grew an average of 1.3 percent, according to Grubb & Ellis.
The growing demand for medical services has kept healthcare construction booming. Norcross, GA-based Reed Construction Data reports that monthly spending on healthcare construction is 20 percent higher than a year ago. For 2008, Reed projects that healthcare construction will jump another 14 percent. Four states accounted for one-third of healthcare starts in 2007: California, Florida, Texas and Illinois. By decade’s end, construction could reach $60.1 bil, according to FMI Corp, a management consulting and investment banking firm based in Raleigh, N.C.
There are multiple drivers fueling demand for healthcare properties. Total public and private healthcare expenditures in the U.S. are expected to grow at an average annual rate of 6.7 percent from 2007 to 2017, according to a report by the Centers for Medicare & Medicaid Services. They will comprise 19.5 percent of GDP in 2017, up from 16.3 percent in 2007.
The 65 and over age group is projected to grow 36 percent between 2010 and 2020, compared with 9 percent for the general population, according to the U.S. Census Bureau. Members of this age group are more frequent users of medical services, according to the National Ambulatory Medical Care Survey, which gathers information about the healthcare provided by office-based physicians.
Individuals 65 to 74 made an average of 6.5 visits per capita physicians’ offices in 2005 compared with 3.3 visits per capita for all age groups, the survey said. The 75 and over age group made an average of 7.7 visits per capita. Meanwhile, the average number of visits per capita for all age groups increased from 2.7 in 1985 to 3.3 in 2005, suggesting a rising propensity among all consumers in general to access healthcare services.
According to data from the American Hospital Association, the number of hospital beds in the U.S. fell from just over 1 million in 1982 to 808,000 in 2004, while the number of beds per 1000 population declined from 4.37 to 2.75, an indication that consumers are increasingly accessing healthcare services in outpatient settings such as medical office buildings and freestanding clinics.
Venture capital spending for healthcare-related products and services hit an all-time peak in 2007, both in absolute terms at $9.5 bil and as a share of total venture capital spending at 32 percent, according to the PricewaterhouseCoopers, National Venture Capital Association: MoneyTree Report.
These factors will propel growth of health-related occupations at about twice the rate of general employment growth over the next decade, and in turn, generate tenant and owner-user demand for medical office space and other types of healthcare properties.
The capital market fundamentals for medical office space were very favorable until the global credit markets seized up in August 2007. However, despite the turmoil in the credit markets, the dollar volume of investment transactions for medical office space hit a new peak of $4.7 billion in 2007, according to Real Capital Analytics.
Capitalization rates declined from 9.7 percent in 2002 to 7.0 percent in 2007, indicating that investors have been willing to pay more per dollar of net operating income generated in the first year of ownership. This has been due to the favorable outlook for medical office properties as well as very aggressive credit markets prior to August and to a surplus of equity allocated to real estate investments.
However, cap rates are expected to increase and investment transactions decrease in the short term because lenders and investors have become more risk-averse since the deterioration of the credit markets. This is true not only for all types of commercial real estate investment, but for investment and credit markets across the broad spectrum of economic sectors in all corners of the globe, the Grubb & Ellis report said.
Nevertheless, medical office buildings and other healthcare properties are expected to weather soft economic conditions better than other property types due to the recession-resistant, non-cyclical nature of demand for healthcare services among U.S. consumers.
“The looming economic slowdown is likely to make the healthcare property sector, with its non-cyclical growth profile; look relatively more attractive compared to other property sectors, all of which will be affected to differing degrees by the flattening economy,” Bach said.
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