Thought Leaders: JLL Healthcare Perspectives – Capital Markets

·         Other changes in loan economics and terms contributed to lowering sale prices and borrower behavior.  Credit spreads widened overall due to economic uncertainty and other competitive factors, compounding higher nominal loan interest rates.  With loan coupons 2 to 3 times higher than in 2021, the level of loan advances against property value were reduced by 15 to 20%.  Debt service coverage was revived as a limiting factor for loan underwriting on the heels of the  ultra-low rate environment.

·         Medical office lending has unique characteristics that are supportive of the property sector overall.  Loan availability has remained strong given the dominance by commercial bank / balance sheet lenders versus CMBS which is more important in other property sectors.  Large loan underwriting, greater than $75 million, is hard to achieve today, creating an impediment to efficient execution on portfolio sales exceeding $100 to $150 million which dominated 2021 medical office sales volume.  Large loans carry significant syndication risk as financing liquidity has become more challenging.

·         The interest rate and debt market impact on medical office property values was dramatic in 2022.  JLL calculates that, before accounting for changes in market sentiment, higher borrowing costs and lower leverage have mathematically impacted cap rates to maintain the same leveraged returns by at least 10%.

·         Portfolio borrowing strategies, rate lock timing and knowledge of active lenders are a few areas where medical office borrowers need to navigate more artfully to maximize loan economics and take advantage of the pricing expansion.  The JLL Healthcare Capital Markets debt specialists are well positioned to advise industry players, dissect the current markets and access a larger universe of lenders effectively.