Thought Leaders: JLL Healthcare Perspectives – Capital Markets

Change in benchmark interest rates

Source: Bloomberg

Key points:

·         2022 was a watershed year with rising interest rates which were at historically low levels in the last decade.  Floating rate benchmarks increased 4.36% in 2022 and, importantly for medical office lending, 5-year swap rates increased more than 2.00%.  The divergent trend in these rates led to an inverted yield curve which is impacting decision-making by borrowers on optimal loan structures and interest rate hedging strategies.  Interest rate caps, a favored hedging tool in the recent past, became substantially more expensive.  A 3-year SOFR cap with a 4% strike rate costs more than 3% of the total loan amount today.

·         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.

Thank you

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Healthcare Capital Markets Contacts

Healthcare investment sales & advisory contacts


Mindy Berman

Senior Managing Director

+1 617 316 6539

Ted Flagg

Senior Managing Director

+1 917 215 7036

Brannan Knott

Managing Director

+1 617 316 6508


Brian Bacharach

Senior Managing Director

+1 214 438 6462

Vasili Davos


+1 214 438 6151


Evan Kovac

Senior Managing Director

+1 206 336 5439

Andrew Milne

Senior Managing Director

+1 858 812 2370

Matt DiCesare


+1 310 407 2149


Healthcare debt advisory contacts


Anthony Sardo


+1 617 531 4198


Timothy Joyce

Managing Director

+1 312 528 3652


John Chun

Managing Director

+1 949 798 4108


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