Editor’s Letter (October 2007)

In your face, credit crunch

AS THIS ISSUE SHOWS, DEALS ARE CERTAINLY GETTING DONE

Dear Reader:

As I wade through the numerous news reports and press releases that we receive from various outlets around the country, and interview folks involved in healthcare real estate, I’m taken aback by the volume of medical office building (MOB) developments coming out of the ground and being planned. The same is true for the number of sales of existing MOBs and other outpatient facilities.

I guess the experts who follow our industry are right on the money when they say the current liquidity crunch that’s rearing its head in residential and commercial real estate cannot halt the juggernaut that is healthcare real estate. Paying more for debt and meeting tighter underwriting standards indeed makes it a bit more difficult to close deals than in recent years. But these nuisances are no match for demographics.

As we reported in our story about how the credit crunch is affecting healthcare real estate last month (please see “Credit crunch hits home” on Page 1 of the September edition), the fundamentals of the U.S. healthcare industry should remain solid for years to come. As a result, firms that make their living in healthcare real estate continue to do business and get deals done.

Just take a look at our “Transactions” section starting on Page 3 and our “Outpatient Projects” (new developments) section starting on Page 7. Both are chock full of news reports about deals both large and small. And the trend is certainly going to continue in our November issue – we’re already collecting data for that issue and the number of outpatient developments taking place throughout the country is quite strong.

Also, our report on MOB sales, which starts on Page 1 of this edition, indicates that 2007 is most likely going to be a record-setting year for transaction volume, according to data we received from the good folks at New York-based Real Capital Analytics (RCA) Inc. RCA tracks and compiles data concerning commercial real estate sales from throughout the country.

We’re also hearing that the current credit crunch might a blessing for smaller firms, or non-institutional buyers, looking to acquire properties – especially if they have plenty of cash on hand or lines of credit. That’s because some of the big institutions that entered the market in recent years and drove pricing up could be taking a hiatus as they wait and see where interest rates and cap rates might settle. As a result, prices seem to be stabilizing a bit.

What is for sure is that demand for medical space should continue for years to come. In many of the developments deals that we report, hospital and health system administrators say new MOB and outpatient space is needed because of just that – to keep up with demand.

Viva la healthcare real estate.

Any thoughts? Go ahead and shoot me an email anytime at editor@hreinsights.com.

John B. Mugford, Editor