Healthcare Real Estate Set for Continued Growth, Says OrbVest CEO

Written by Tamar Plotkin Posted On Tuesday, 06 April 2021 22:55

The economic effects of COVID-19 have been cataclysmic and a generation-altering event, impacting the way we work and live.  Once lively office buildings remain barren in major cities, as people who are able to continue to work from home, remain at home -- preferring telecommuting and Zoom meetings to the drudgery, time and expense of a daily commute.  Even as the pandemic ebbs, experts see these trends continuing and, as a result, commercial real estate is suffering its most significant threat since 2008.

More retailers went bankrupt in 2020 than during the Great Recession.  While a successful nationwide vaccination effort is a light at the end of the tunnel, more retail properties are expected to fail as political will for stimulus payments and tax relief wanes. Experts fear that without government support, a record number of landlords are expected to default on their loans in 2021. 

In New York City, for example, commercial real estate is facing an existential crisis. In Times Square of all places, about $1.1 billion worth of property loans are now considered distressed -- including 229 West 43rd St (owned by Jared Kushner) which slashed its value by 80% to about $92.5 million in its latest property appraisal.

Federal Reserve data corroborates these trends and shows that U.S. commercial property debt climbed to an all-time high of $3.06 trillion in Q3 2020, up from a 10-year low of $2.2 trillion in 2012.

Source: MarketWatch

Consider the plight of office properties too. CBRE claims that demand could be permanently cut by 15% because of the shift to remote work. Just look at this forecast of office vacancy rates. 

Source: Yahoo! Finance

So with all of this doom and gloom in the real estate landscape, you may think it’s a bad idea to invest in commercial real estate right now.  That depends entirely on which sector you are looking at.

As hospitals and urgent care facilities are devoting significant resources to COVID and vaccine administration, as patients are postponing elective surgeries, and as telehealth has made it possible to deliver care remotely, even healthcare-related real estate has not been immune from concerns about a downturn.  But the past eighteen months have shown the trends in the healthcare real estate sector have proven the thesis that healthcare real estate is remarkably resistant to economic downturns.

“Covid-19 tested, and validated, our strategy, demonstrating the resilience of healthcare assets,” said Martin Freeman, CEO of OrbVest, a global real estate company that invests in US income producing medical commercial real estate. 

“OrbVest collected on average above 95% of rentals owed by all our tenants in our buildings.  OrbVest has experienced significant growth from July [2020] onward, given the performance of the healthcare niche and its recession proof nature. We have attracted new investors from around the world and equity raised has climbed consistently month-on-month. OrbVest successfully launched six new projects within six months.  OrbVest is extremely well positioned for growth and success over the coming year,” said Freeman.

2020 accelerated existing healthcare industry trends and changed the patient-provider relationship dynamics. This new normal can pose a unique opportunity for forward-thinking investors to position themselves to capitalize on durable, demographic-supported, long-term demand in healthcare real estate – especially strategically located medical office buildings.

The statistics and demographic trends may shock you. 

According to JLL’s new Healthcare Real Estate Outlook: Adapting to a New Reality, three primary factors should contribute to the appreciation of healthcare real estate over the next 20 years:

1. Aging Population = Growth and Demand for Medical Services

According to the Urban Institute, the number of Americans aged 65 and older will more than double over the next 40 years, reaching 80 million in 2040. But the number of adults ages 85 and older, the cohort most often needing medical care, will nearly quadruple between 2000 and 2040. 

(Source: Urban Institute)

By 2040, about one in five Americans could be age 65 or older- up from about one in eight in 2000. 

(Source: Urban Institute)

The U.S. population is aging drastically and should continuously drive more demand for healthcare services. Just look at this map of the U.S.’s median age by county in 2000 compared to 2016. The darker the shade of green, the older the median age. The darkening of the map coincides with the graying of America. 

 

        Source: Census.gov

Notice all of the big blocks of dark green shades in states like Arizona, Nevada, and New Mexico. The south looks considerably darker than it did in 2000. The entire state of Florida appears to be darker overall than every other state. Sections of Northern California and Oregon also have some dark blotches. 

It’s no wonder then that there appears to be a direct correlation between the oldest regions of the country, and which regions saw the greatest volume of medical office building sales in Q4 2020. 

Source: CBRE

If done well, combining advances in technology and telehealth with the healthcare system and an improved/aligned payor system for reimbursement, more per capita space in healthcare real estate for both the in-patient and outpatient environment can meet a growing need and capture and retain an increasing amount patients as the need for services increases.

2. Outpatient Care Migrating from the Hospital

Even before the pandemic outpatient care was moving away from the hospital and into outpatient facilities.  COVID-19 merely accelerated the trend.

• Aggregate hospital revenue from outpatient services grew from 30 percent in 1995 to 47 percent in 2016.
• Health plans and government program payment policies also services in lower-cost care settings, such as outpatient facilities.
• Health systems began acquiring or partnering with physicians and physician practices, and driving up the volume of services performed in outpatient settings.

But if there is one thing that the pandemic exposed, it was how effective ambulatory care and non-medical uses were when outside of the hospital. Originally, this was supposed to be a temporary solution as health systems scrambled to develop exclusive facilities for ambulatory and administrative services to deal with the potential surge of in-patient demand and to “stop the spread.”  Medical directors found it actually worked better this way!

Once this pandemic-era fully ends, moving ambulatory care permanently to outpatient medical facilities might be a permanent trend. Moving these services should create a wave of demand for medical office space.

3. Redesigns Inspired by Telehealth 

Redesigns inspired by the integration of telehealth is a huge development factor and something to seriously consider when focusing on how accelerating telehealth trends could actually supplement rather than supplant on-site care. 

If done right, telehealth can maximize productivity per square foot and potentially change and reduce but not eliminate the need for significant square footage. Obviously, there is not a universal right or wrong for every medical practice. But providers will need to decide which procedures to make virtual and which to keep in-person, and how to adapt space to their clinical operations.

Even in a pre-pandemic world, telehealth was growing. However, it was a slow increase possibly due to “obstacles including the lack of a consistent payment strategy, unclear relative advantage and implementation scope, education and infrastructure investment requirements, lack of experiential foundation, and concerns surrounding fraud and abuse,” according to HealthAffairs

Telehealth, however, has surged in the last year thanks to COVID. The impact that this next-gen approach to healthcare has had is undeniable. For the first time in human history, health-related services and information can be available to patients from the comfort of their own homes. 

With hospitals drastically slashing their services due to the pandemic, this has been absolutely critical. Not only that, hospitals also need to offer safe and socially distanced medical care, with efficiency and effectiveness of telemedicine appointments.  

The trend could only grow from here. A recent Forbes article claimed that hospitals in the U.S. are “scrambling” to offer telehealth and home services amid COVID-19 to supplement revenues lost from lucrative sources such as elective procedures. Fortune Business Insights also believes the telehealth market could be worth $559.52 billion and see a 25.2% CAGR by 2027.  

While it would be reasonable to think that telehealth could replace physical healthcare facilities, this is not the case. Healthcare real estate and retail real estate share some commonalities (as we will discuss later). However, sustainable and integrated telehealth is a long-term play that will not reduce healthcare real estate demand. It will actually stimulate it. 

(Source: HealthAffairs)

First and foremost, telehealth will galvanize a need in healthcare real estate by increasing patient touch points within the healthcare system. Telehealth can provide increased access to healthcare and provides a more convenient point-of-entry for millions of Americans. The ease, efficiency, and convenience of telehealth may also increase patient commitment and retention and lead to more in-person appointments too.

(Source: JLL)

Consider the number of patients that can be reached in remote and underserved areas too. Look at how telehealth improves compliance with prescribed treatment plans, including follow through on required appointments.  As the pandemic subsides, there will be a surge in demand for redesigned telehealth provider suites.

Looking Ahead

Amid stock market volatility, interest rate uncertainty and concerns about the retail, hotel, and office segments of the commercial real estate market, investment companies are scrambling to meet investor demand for healthcare real estate and their well-earned reputation for stable, steady growth.

“We are encouraged by the strength of investor interest in the medical office building deals and projects that we have recently brought to market,” says Freeman, “OrbVest closed on the sale of Medical 5 in February 2021. The investment, located in Atlanta, Georgia, was held for five years, delivering solid cash-on-cash returns culminating in an overall investor return of 11.35% per annum in USD.”

As the impact of the proposed $1.9 trillion stimulus package from the US government meanders its way across the various sectors of the economy, this should blunt any further negative impact from Covid and assist with the country’s economic recovery, which is already underway.  The strongest commercial real estate sectors should be expected to see the greatest immediate impact, and the healthcare sector is poised for above average growth for the foreseeable future.

 


Tamar Plotkin is a freelance real estate and technology writer based in Tel Aviv, Israel.

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