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Industry Pulse: Healthcare real estate demand like to remain strong in 2019

Experts still upbeat about HRE despite stock volatility and recession talk 

The “Deal Flow Drivers” panel featured (from left to right), moderator Stefan Oh of American Healthcare Investors, Caroline Chiodo of HTA, Trisha Talbot of Newmark Knight Frank, Darryl Freling of MedProperties Realty Advisors and Eric Tellefson of Capital One. (HREI photo)

SCOTTSDALE, Ariz. – As the domestic and global stock markets continue to show plenty of volatility, with an economic slowdown potentially on the horizon, investors continue to look for safe places to put their money.

One such place is healthcare real estate (HRE), particularly medical office buildings (MOBs), according to panelists at the RealShare Healthcare Real Estate conference held Dec. 5-6 at the JW Marriott Camelback Inn in Scottsdale.

“(Investors) are looking for places to put their money that will be safe and produce returns during a potential downturn, and more and more they are looking to healthcare (real estate),” said Darryl Freling, managing principal with Dallas-based MedProperties Realty Advisors, which has been investing in healthcare facilities for more than a decade. “We are an alternative investment vehicle, and we invest in long-term assets in the space, and they have performed well during good economic times as well as during the last recession.’

Mr. Freling was part of a panel session titled, “Deal Flow Drivers: Dissecting Demand & Capital Flow in 2019.” Other panels during the conference focused on the economy, the viability of long-term healthcare facilities, the impact of technology on healthcare, repurposing retail spaces for healthcare uses, and others.

As a result of the steady cash flow resulting from the stability of medical tenants, demand for HRE facilities and MOBs has soared in recent years, with large institutional investors discovering the space. This demand, panelists noted, has driven prices high and capitalization (cap) rates, or first-year estimated returns, to record lows.

“The demand is certainly there, and will continue to be, with a lot of capital raises taking place for this investment type,” said Caroline Chiodo, senior VP of finance with Scottsdale-based Healthcare Trust of America (NYSE: HTA), which says it owns the largest MOB portfolio in the country.

The only potential hindrance for the MOB investment market is a lack of products on the market. “Demand is there, it’s just more a function of deal flow,” she said. Mr. Freling added that rising construction costs could keep HRE development numbers low, creating even more demand for the market’s existing properties.

Eric Tellefson, managing director of medical properties with Capital One, said institutional investors who became curious about the property type in the last five years or so have begun to buy, often forming joint venture partnerships with experienced MOB development firms to make such purchases.

They’re doing so, Trisha Talbot, managing director and a broker with a local office of New York-based Newmark Knight Frank (NYSE: NMRK), because owning HRE facilities can be more complex than owning other property types.

Even though interest rates have been rising, cap rates for MOBs have not fallen much, if at all, because of the strong and ongoing demand, according to the session’s moderator, Stefan Oh, executive VP of acquisitions with American Healthcare Investors.

The panelists agreed that demand should remain strong for HRE facilities and MOBs throughout the next year, even with a potential economic slowdown.

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