Texas Real Estate Business

OCT 2017

Texas Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in Texas.

Issue link: http://texasrealestatebusiness.epubxp.com/i/885420

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Page 45 of 58

www.REBusinessOnline.com Texas Real Estate Business • October 2017 • 43 I nvestor demand for healthcare properties throughout the country is soaring, driven primarily by the recession-resistant nature of the asset class and its subsequent ability to con- sistently generate strong returns. Confidence in the property type also stems from the prevailing real- ization that legislation opposing the Affordable Care Act (ACA) has thus far been unsuccessful. After multiple failed attempts to repeal and revise the law, the Republican Party intro- duced a bill on Sept. 19 that aims to cut overall funding for healthcare and give states more control over their in- dividual healthcare budgets. Other demand drivers for the healthcare sector include a growing number of aging Americans, the ten- dency of healthcare tenants to sign long-term leases and an expectation that government spending on health- care, as a percentage of gross domestic product (GDP), is set to rise above its current level of 15 percent. It all adds up to a remarkably healthy flow of capital into the health- care sector from institutional, private and foreign investors alike. Five healthcare real estate panelists at the ninth annual InterFace Health- care Real Estate conference discussed a variety of topics within the health- care investment market, including the profiles of investors, the pressures they face to deploy capital in a timely manner and the market forces induc- ing property owners to sell. The event was held on Sept. 14 at the Westin Galleria hotel in Dallas and attracted about 240 healthcare real estate bro- kers, lenders and developers from around the country. Panelist Jonathan Winer, senior managing director and chief invest- ment officer of New York-based in- vestment firm Seavest Healthcare Properties, highlighted the key traits that have recently drawn REITs and non-institutional players to the space. "Some investors are focused on the defensive, recession-proof nature of the asset," said Winer. "Others are drawn to the variety of individual as- sets that have traded at sub-5 percent cap rates in recent years. And others are focused on the relative value of the yield, which currently exceeds that of industrial assets." Winer added that the vibrancy of the current market is prompting fund managers that represent institutional capital to act quickly on healthcare in- vestment opportunities. Interest in the property type from new investors has taken more time to materialize, primarily because of the steep learning curve associated with operating healthcare properties, ac- cording to panelist Mervyn Alphonso. "There's definitely an educational process involved for new capital play- ers entering the market," said Alphon- so, who serves as senior vice presi- dent of development for Washington, D.C.-based Anchor Health Properties. "You can come in and buy the largest portfolio in the world, but if you don't have an operational strategy, you're in trouble. This is a long-term game with long-term tenants, and you have to understand that." Panelist John Trabold, director of real estate services for healthcare ad- visory firm VMG Health, concurred with Alphonso's statement that healthcare tenants prefer longevity in their leases. "One of the great selling points of medical real estate is the retention rate," said Trabold. "Simply put, doc- tors do not like to relocate. So that's a big part of the recession-proof percep- tion of the asset — you have a stable base of tenants who make good mon- ey and tend to stay in one place." Alphonso and Winer both noted that Asian and Brazilian investment firms are among the leading sources of foreign capital in the sector. Their need to diversify is driven by political instability and slow growth in their domestic real estate markets. Moderator Andy Dow, chairman of the healthcare industry group of Dal- las-based law firm Winstead PC, of- fered anecdotal evidence of the asset class' popularity. Dow stated that his firm represented one of the bidders on Duke Realty's firesale of its healthcare holdings in May 2017, a portfolio that totaled nearly 7 million square feet across 78 properties in various stages of development. In its attempt to merely get into the running for the acquisition, Dow's cli- ent spent millions of dollars on due diligence and other costs associated with the bid, only to come up empty. The portfolio later sold to Healthcare Trust of America for $2.95 billion. "To me, that's one of the most sur- prising things about today's market — that a seller could dictate those kinds of terms and still have so many interested parties," said Dow. After establishing the breadth and diversity of the demand for healthcare properties, the panel shifted gears to analyze the supply side of the equa- tion. The group collectively assented that the strength of the investment de- mand alone would precipitate more ground-up development in new mar- kets in the coming years. The panel also theorized that the higher costs of labor and compliance facing healthcare providers in today's market, plus the rising costs of mainte- nance for owners of older properties, would eventually incentivize more sellers to come out of the woodwork. Panelist Kyle O'Connor, president of Boston-based MLL Capital, noted that among the active sellers of health- care real estate are aggregating firms. These companies buy low-quality as- sets and dispose of their holdings in portfolio sales, and there is in fact a market for this activity. "It does seem that healthcare has entered into the age of the portfolio sale," said O'Connor. "Whether that's a temporary trend as a result of pricing or a long-term trend, we don't know, but it's definitely something we're go- ing to see more of in this market." n Texas Conference I BOOTH 529 P LAY T O W I N Success is the product of careful planning, thoughtful team building, and making the right move at the right time. Colliers' advisors know how to set the board so that your commercial real estate strategy supports your core business goals. Colliers will help you increase your bottom line, enrich your brand, and energize your people. Make the move to Colliers and win. While most brokers show you the price of real estate, Colliers' advisors show you the value of real estate. COLLIERS.COM/ TEXAS From left to right: Andy Dow of Winstead PC, John Trabold of VMG Health and Jonathan Winer of Seavest Healthcare Properties. Not pictured: Mervyn Alphonso, Anchor Health Properties, Kyle O'Connor, MLL Capital. DEMAND FOR HEALTHCARE PROPERTIES SOARS Stable returns are driving investment interest in healthcare real estate, says InterFace panel. By Taylor Williams

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