Cover Story: Management takes center stage

Operations and leasing are in the spotlight amid a slowdown in deals and development

By John B. Mugford

For a few brief weeks at the tail end of 2023 and the start of 2024, when it appeared that the U.S. Federal Reserve was planning to reduce interest rates, the hopeful battle cry of the healthcare real estate (HRE) industry was, “Do more in ‘24.”

Unfortunately, as winter turned to spring, those expectations faded. As the inflation rate remained stubbornly high, the Fed backed away from its earlier guidance, and most experts now predict perhaps only one – or maybe even no – interest rate reductions this year.

If that’s the case, we’re probably in for another relatively slow year for HRE sales and development.

As a result, many HRE executives say they will heighten their focus on operations and managing their portfolios, perhaps investing more into what they currently own than going out and making acquisitions or embarking on new projects.

Thus, the new battle cry for the industry might be, “Manage more in ‘24.”

‘Manage more in ‘24’

Paying closer attention to management and leasing was a predominant theme when members of the HREI™ Editorial Advisory Board gathered April 9 in Nashville, Tenn., for their annual meeting. The board members comprise leading executives with many of the sector’s top brokerage firms, developers, investors and owners, real estate investment trusts (REITs), health systems, advisors, and others involved in the space.

To encourage board members to speak freely, HREI makes sure most of the day-long discussion is “off the record” and not for publication. However, at one point during the meeting, board members are asked to speak “on the record” about what they foresee for the HRE sector in the year ahead. Here’s what they had to say.

As noted above, with fewer headline-grabbing deals and developments taking place and consuming company resources, several board members said they are placing more emphasis on the “less sexy” aspects of their businesses. Those include marketing, leasing, property management and asset management, as well as some of the even more routine tasks, such as budgeting, reporting and maintenance.

Roni Soffer, chairman and CEO of Hallandale Beach, Fla.-based TopMed Realty LLC, summed up the firm’s current state of mind by noting, “We remain focused, really, on existing assets and trying to find opportunities to reinvest in those existing assets.”

Likewise, Ryan Crowley, senior VP of investments with Nashville, Tenn.-based Healthcare Realty Trust Inc. (NYSE: HR), said that the publicly traded real estate investment trust (REIT) is currently focused on “operating efficiency on the management side of the business.” That’s quite an adjustment for HR, which went on a buying spree from 2019 to the first half of 2022, becoming the largest owner of medical outpatient buildings (MOBs) in the sector with a portfolio of about 40 million square feet.

However, as Mr. Crowley noted, there has been a “sea change for everybody in the room since the second half of 2022, when interest rates began to rise and debt started to become harder to come by.

“I think it’s been doubly so at Healthcare Realty because it was at the midpoint of (2022) when we consummated our merger with HTA (Healthcare Trust of America and its 24 million square foot MOB portfolio).

“It was also around that same time when the capital markets inflection occurred,” Mr. Crowley continued. “For us, that meant a reorientation of our focuses leading up to the merger, when the capital markets were highly cooperative.”

As noted, Healthcare Realty was an aggressive buyer from 2019 through the first half of 2022, a time when experienced a “cost of capital” advantage over others in the sector and “we made $2.24 billion worth of transactions in that relatively short period of time,” he said.

“But then, frankly, we paused, largely at that point in time and following the merger with HTA, and since then have done nearly as many dispositions in terms of volume as we had made in acquisitions during that period.”

Mr. Crowley added that in an “inflationary environment like this we have heightened focus on bringing down operating expenses and creating value that way. But (we have even) more of a renewed and laser focus on leasing. For us, it’s all about space absorption…

“Whether you’re using capital to make new investments or you’re using capital to invest in the buildings you already have, at this point in the capital cycle, it makes more logical sense for us to deploy that capital into the buildings we already have. You get a better return by investing in tenant improvements (TIs), leasing commissions, building improvements, and improving occupancy than you do on doing one-off acquisitions.”

‘There’s really not much else to do’

Michael Bennett, managing partner and chief investment officer with Minneapolis-based MedCraft Investment Partners, joked with the HREI board members that he woke up every morning for the past year or more and looked himself in the mirror and said, “’It’s not your fault, it’s not your fault, it’s not your fault,’ like Robin Williams said to Matt Damon” in the movie “Good Will Hunting.”

Mr. Bennett noted that the firm “had a capital partner that really wasn’t doing deals, and so that didn’t help us grow our assets under management (AUM).”

So, while slowing down its acquisitions, MedCraft “sharpened our sword in order to get better, doing some asset management work on our portfolio, looking at our leasing, looking at our rent roll, looking at building a better relationship with our tenants through asset management, and adding even more of a high-touch outreach to them.

“There’s really nothing much else to do but try and grow the portfolio organically, whether or not our tenants needed an ASC (ambulatory surgery center) or they were looking at building another ambulatory building – and we’re talking not just about hospital systems but physician groups as well.

“And, we were able to make some traction in that regard,” Mr. Bennett observed. “Our development pipeline looking forward right now looks really, really good. But, as you all know, that’s binary. It could be all of them that move forward, none of them go forward or some of them do.

“We just don’t know. But we feel good that we’ve got at least a nice pipeline.”

As MedCraft has sharpened its focus on asset management and development, Mr. Bennett, who specializes in making acquisitions, has instead put more of a focus on finding new capital sources.

“I’ve been going out and meeting with everyone and everybody who wants to meet with us or that has even an inkling of interest, or a modicum of interest, in medical office,” he said, joking that the folks attending the HREI board meeting “can all thank me, as I’ve been beating the bushes so hard that when new capital groups come to the sector, it was all me.

“I do think that there is going to be more new and interesting capital groups that partner with operating partners at this table,” he added. “This year, I think it’ll be a little bit of a trickle. But I think you’ll see some surprising names come in, not unknown names, and then I think it’s going to continue to pick up in 2025.”

For some, development outpaces acquisitions

A few of the other board members noted that while their firms have slowed their acquisition activity, they are seeing strong demand for development projects, which they note can provide better yields than making acquisitions. Like several of the other firms represented on the HREI board, these firms are also focusing on operations and managing their portfolios.

Jonathan L. “John” Winer, president and chief investment officer with White Plains, N.Y.-based Rethink Healthcare Real Estate, said that the current state of the market has prompted the firm to have a “two-fold” focus.

Those two aspects of the business are development and asset management.

“On the deal side, the investment side, we’ve really focused on development transactions with our various partners,” Mr. Winer said. “We went into (2023) with a pipeline of 10 or 11 development projects and we made it about halfway through that pipeline last year. So, we entered this year with a handful of projects and have added a few more since then – this is with multiple development partners.”

Rethink currently favors development deals over acquisitions because “we are getting yield and we are creating Class A assets, which I think … ultimately, when they are aggregated into a portfolio, will generate strong returns when, hopefully, portfolio premiums return to the market.

“I don’t see us changing that focus this year.”

Mr. Winer noted that Rethink is looking at and considering “underwriting acquisitions, as there have been some interesting” properties on the market.

“But, we’re not quite sure when we’ll get back into the acquisition side of our business, as right now it’s been about development,” he said.

“Interestingly, the other thing we’re focused on … has been our asset management process. We’ve added new systems … both on the accounting and asset management side to improve efficiency. We’ve always had all of our property managers use Yardi System (a property management software firm based in Santa Barbara, Calif.) and other products, but now we’ve implemented some additional software. It’s really starting to show some of its value in the metrics we’re able to track at virtually any time.

“We have weekly meetings, we report on key metrics in our portfolio. So, it’s really been a terrific add to what we’re doing and I think, philosophically, the right thing to do in times like this when you might be slowing down on the project side what you really want to do is bear down on asset management. It’s a very important part of the business.

“For those of us who are investment managers, it’s called asset management. So, you know, that’s what we’ve been doing, I think more of the same, more of the same this year.”

James Schmid, chief investment officer with Charlottesville, Va.-based Anchor Health Properties, one of the sector’s most active acquisition and development firms in recent years, noted that while the sector has been in a bit of a slowdown, most notably on the acquisitions side, the firm’s business is “good overall” as it focuses more on development.

“It’s nice to have a vertically integrated national platform, because that certainly helps balance (things out) when certain elements are busy and others aren’t as much. Ben (Ochs, CEO and managing partner) and I have grown our platform primarily by acquisitions over the last eight or nine years, and I really think that in the last 18 months that dynamic has crossed over” to the development side of the business, “which has taken on an increased growth load for what we do.”

Anchor, Mr. Schmid noted, is currently building, or has in its pipeline, “roughly $800 million dollars of new product, primarily in Sun Belt markets. We’re very active on the development front, as we continue to see a need for all sorts of projects, from outpatient ambulatory to inpatient rehab, to behavioral health to freestanding emergency departments and all things in between.”

While the acquisitions side of the business remains slow, Anchor is, like many other firms, focusing on managing its 9 million square foot portfolio.

“We’re able to really drive business, maintain our occupancy of 94 percent nationwide across our assets (and) drive rents,” he added, noting that the firm has been able to achieve rental rate growth of about “8 percent, which is great, and historically … a high point versus what we’ve seen the last 10-plus years. We’re getting NOI (net operating income) growth of 3 percent plus.”

Mr. Schmid added that driving strong rental rate growth is currently a good possibility, as the cost to develop new projects continues to rise, meaning current tenants, as well as prospective tenants, would have to pay even higher rents in new projects.

“When you look at (rental rates in current facilities) nationally, versus where replacement costs have gone, I think there’s just a lot of room to continue to push rents.”

Keeping busy through diversification

Mark Toothacre, CEO and managing partner with longtime HRE development firm PMB, which is based in San Diego, said the firm has been quite active in delivering and starting new projects of late.

“We are really busy (on the development front),” he said. “We’ve just delivered three projects in the last three months, we have four projects under construction, and we hope to be starting three new projects in the next three months, two of which are self-financed by our clients and one of which we hopefully are closing on our construction financing shortly.”

He added that the firm has four or five additional projects it hopes to start during the remainder of 2024 – if it can find financing that works.

“We’re quite diversified by product type, so we’re doing some IRFs (inpatient rehabilitation facilities), inpatient behavioral health, outpatient behavioral health, some MOBs, and a senior housing project or two,” Mr. Toothacre noted. “Most of our projects … are build-to-suit in nature, and when we do some spec space on a development … it’s usually just a modest add-on” on top of a project with an anchor tenant already pre-signed to a lease for a majority of the building.

“As for our existing portfolio, it’s doing great, at 96 or 97 percent occupied, with 3 percent-plus NOI growth.”

Mr. Toothacre noted that because occupancies are rising throughout the HRE sector, firms such as PMB have been able to increase rents, even with the cost of building new projects being about “twice as much as it (did not long ago). That’s going to set a floor under existing rents, and the opportunity cost to go do something, or the threat (by a tenant) to go (build or lease space in a new development) is not viable (for tenants to try to negotiate significantly lower rental rates).

“If you’ve got a good existing asset, your client, your tenant is not going to go elsewhere.”

Greg Venn, CEO and founding partner of longtime HRE firm NexCore Group LLC, which is based in Denver, joked that he considered 2023 to be a “just a flesh wound” for the HRE sector. He was quoting a famous line uttered by the Black Knight, a character who’d had both of his arms cut off, in the 1975 movie, “Monty Python and the Holy Grail.”

“I think one of our capital partners (said) the next two years are going to be throwaway years,” Mr. Venn said. “And despite all of that, we got a few transactions done last year; we got about 75 million in medical and about 75 million in seniors housing transactions completed.”

“But, I would say the biggest thing we did, as far as I am personally concerned, was that we improved our leadership … because it’s so important to make sure that somebody else is going to run the company and somebody else is going to take the company and take it to the next level.”

He said the firm’s pipeline for 2024 is about “three times more than we did last year, but whether we get that many deals done is going to be dependent more on systems and physicians making timely decisions, probably less so than about the capital. I still find that the capital is there for the healthcare deals, even though lending on seniors housing has definitely tightened. But, we do have lending for all three seniors housing deals that we’re planning to break ground on, with full letters of intent – so I think we’ll get those deals done, probably because we built up our senior living operations this last year.”

In talking more about the firm’s seniors housing business, Mr. Venn noted that in 2023 NexCore “took over the management of all the assets we have … 1,500 units that we’re operating now, so that’s been a big jump for us to get that in place, and I really see the occupancies rising and the costs coming down. I know we made the right decision, but it was a big investment decision to do that.”

Bolstering from within

For some firms, the slowdown in the market has given them time to make significant changes in the structures of their organizations.

A good example is Irvine, Calif.-based American Healthcare REIT (NYSE: AHR), which went public in early February.

Stefan Oh, the REIT’s chief investment officer, said the firm spent much of 2023 “working towards doing our initial public offering, and part of that was trying to lower our debt, also pruning our portfolio a bit and, you know, that led to us being sellers during the year, partially, some senior housing but the majority of it was medical outpatient buildings.”

The idea of the pruning, Mr. Oh noted, was “to get the portfolio in the best institutional shape that it could be,” adding that about 75 percent of the MOBs that it sold were smaller than 30,000 square feet and were “geographically isolated properties within our portfolio.

“We did have a good 2023 in terms of performance, as we saw pretty strong same-store growth in our MOB portfolio, probably the best we’ve had in a while. So for 2024, I would expect that we’re going to continue to be net sellers in the space, but we’re going to be very selective about what we put out in the market. We’ll be opportunistic and obviously, only pulling the trigger if we are happy with the results.”

What’s in store for the rest of ‘24?

Thomas W. “Tommy” Tift III, a longtime HRE professional based in Atlanta who serves as an executive VP with Dallas-based Lincoln Property Company, said despite some stability with interest rates, 2024 is going to be a slow year, especially for the acquisitions market.

That’s because there’s “still going to be a delta between the bid-ask on acquisitions and on value-add,” Mr. Tift noted. “I think the Fed will maybe do one more interest rate cut … before the election. That being said, it’s not going to be a very big cut … and will not affect the interest rates that much.”

Mr. Bennett of MedCraft noted that all of the trouble with the general office sector, where many firms and their employees are still working remotely, will be to the advantage of the MOB and HRE segments.

“We’re going to be a benefactor of that attrition over from office to medical outpatient.” he said. “And, I am bullish that the capital markets will cooperate and we’ll get a little bit more equilibrium this year.

“From there, I think we could be off to the races in 2025.”

Jim Kornick, a sales broker and principal in the Washington, D.C., office of Toronto-based Avison Young, said it’s been a “struggle” to get deals during the past year and a half.

“Getting debt was a struggle,” he said. “Every molehill was a mountain in the process of getting the deals to close and, fortunately, we turned down a lot of deals which have ended up being hung deals because the seller really wasn’t motivated to sell.”

He added that he believes, “Frankly, for the rest of this year, we’re looking at a similar pattern. I think it’s going to continue to be slow.

“But I do think the sector will continue to thrive. It’s always amazing to me how we rise above all the other asset classes because of the stability and performance of this sector, and people do get that. When the debt’s there, I totally agree, the capital is going to flow like the days that we enjoyed” until the second half of 2022.

When will activity pick up?

In looking to the future, Mr. Schmid of Anchor dropped a bit of a bombshell, saying, “I may be in the minority here, but I think interest rates have as good or better of a chance to increase over the next 12 months as they do to decrease.”

As for how to move forward in the current market, he added that he believes firms looking to do deals, be they acquisitions or developments, need to be “opportunistic” and on the lookout for potential transactions.

“It pays to be thoughtful on where value can be added, whether it’s acquiring some additional land sites and trying to line up some build-to-suit developments, or working with some tenants in the market to find them space and acquire buildings that they can immediately occupy.”

As most of the members of the HREI board noted, there are not many “down-the-fairway, stabilized” acquisition opportunities in the current market.

“And, the debt markets continue to lag in my opinion,” Mr. Schmid added. “I really think this sector can use more and more institutional lenders of size and scope, not just at a moment in time, but in general going forward. It would be great to have more wire-line banking relationships that choose to bank in the ambulatory outpatient sector. And that’s because the sector has lost a number of lenders in recent years – and we continue to feel a bit of a gap there.”

Andy Dow, an attorney heavily involved in the HRE sector as well as a shareholder and chair of the Real Estate Industry Group with Dallas-based Winstead PC, noted that lawyers involved in the industry typically “do very well in the good times and do very well when things are really bad. It’s when there’s not a lot of transactional activity that the law firms struggle, and that’s kind of where we have found ourselves over the last year or so.”

Even though deals continue to close, Mr. Dow provided his fellow board members with an insight into how the transactions market has changed over the past year or so by noting that during the years leading up to 2023 about “one out of every 10 deals that we were engaged to work on would die for one reason or another.

“But I’d say that over the last 12 months or so, that’s risen to about five out of 10 deals failing for one reason or another, with just the smallest little hair trigger” causing the deals to fail.

“In some cases, the client was maybe a little over-optimistic in terms of their ability to get debt, and/or they just couldn’t pull together the capital stack the way they thought they could, even though they liked the asset.”

Mr. Dow added that although the market remains “in slowdown mode,” he and his firm have seen an uptick in “tire kicking” by potential HRE facility investors during the past couple of months.

He also noted that the Winstead law firm has been “doing quite a bit of planning with clients … about impending (loan) maturities in order to get ahead of the game with the lenders and trying to (figure out what they are going to) require in terms of renewing or extending a loan.

“The answer to that,” he said, “is usually some sort of a paydown, but maybe not quite as much as we originally thought it would be, in some cases, because … it seems like the lenders have bigger problems to worry about, and if you’ve got a performing asset that maybe is just teetering on falling out of covenants, they’re not as concerned about that at this point. They may get concerned later, but the but they don’t seem to be that concerned just yet.”

‘I think we’re in for a pretty tricky year’

Philip J. “PJ” Camp, managing director with the Healthcare and Real Estate Investment Banking groups with New York-based Fifth Third Bank, called 2023 an “earth-shattering” year for the HRE and MOB sectors.

“For the first time in 10 years, sales volumes were down, and they were down dramatically,” he said. “They were down like 60 percent.”

He noted that capitalization (cap) rates, or estimated first-year returns on investments, also increased for the first time in the past 10 years or so, ending a long period of historically low cap rates.

The reason for the slowdown in sales and the increase in cap rates, however, was not the fault of the product type itself, Mr. Camp said, as “the general real estate industry was in a real tough spot in 2023 and I think our sector got dragged down, got caught in the downdraft there.”

With other real estate sectors hurting even more than HRE, he said he believes “a lot of players from those other sectors will start looking at our sector as a nice sector to be in. Where are all those office folks going? Where are all those multifamily folks going? A lot of them are looking at our industry, and we’re going to have a lot more buyers coming into our space, and a lot more advisors as well.”

As for his firm, previously known as H2C Securities, Mr. Camp said, “We had a pretty decent year last year. Our focus on healthcare systems and our focus on the IRF (inpatient rehabilitation facilities) space as well as the behavioral health space, where we have kind of a super concentration or super focus, helped us quite a bit. I think focusing on developer selection work and the RFP (requests for proposals) work, sale-leasebacks and monetizations, all of those things helped us have a pretty good year. And, we feel like the pipeline is pretty good for this coming year.”

As for the year ahead, Mr. Camp said he thinks “volumes will pick up a little bit in 2024,” as he believes some owners will sell assets “because they have to sell, not because they want to sell.

He added that he believes “cap rates are probably not aren’t going to move much. When it comes to interest rates, I think we’ll get one, or a maximum of two, rate cuts this year.

“I think we’re in for a pretty tricky year, as there are a number of risks, with the inflation risk still out there, as well as geopolitical issues around the world. Also, we have an election coming up, and that’s going to create a lot of uncertainty, I think. So, I think this year is going to be choppy.”

Not expecting much interest rate relief

Malcolm Sina, chairman of longtime HRE firm Sina Companies, based in Palm Beach Gardens, Fla., said he does not think “interest rates are going to come down anytime soon, maybe once before the November election.”

Even so, Mr. Sina said he is optimistic about the firm’s future because he believes the HRE product type remains a strong one.

In addition, the firm continues to work with clients and people that “we’ve known in the industry for a long time. The vast majority of our business has been with repeat and referral customers as opposed to responding to RFPs, as the last RFP project it worked on fell through when the client, a health system, “found a new CFO and we lost the deal because they decided to do it themselves.”

“A lot of our projects are multi-phase, multi-use developments, some of which we control all of the land ourselves, and a lot of which are what I would call health parks with multiple phases where we’ll do either a micro hospital, a freestanding emergency department, medical outpatient buildings” and others, he said, noting that the firm has been heavily focused on the Sun Belt states.

Richard Rendina, chairman and CEO of Jupiter, Fla.-based Rendina Healthcare Real Estate, a longtime HRE sector firm, says the company currently has its own motto: “Do more in 2024; survive in 2025; save your sticks for 2026.”

He added that as far as “interest rates go, I think the prospect” of seeing cuts in 2024 “is unlikely, because what would happen next? All that dry powder Shane (Seitz) was referring to, starts to come into the market, and we end up with more inflation, and then we’re talking about increasing rates again.

“I think the best thing that can happen is stability with interest rates and projections, and I think that allows for opportunity and transactions to take place,” he said. “We’re focused on both acquisitions and development, but we’re very much focused on development with existing and repeat or relationship-based opportunities. We’re hopeful to fill that that pipeline, but I do think development numbers (sector wide) are going to be down significantly in 2024 and ‘25.”

Opportunities in conversions and value-add projects

John Pollock, chief financial officer and managing director with Walnut Creek, Calif.-based Meridian, an acquisitions and development firm that is well-known for repurposing properties into HRE facilities, said the firm had a good year in 2023.

“We finished some developments that we priced back in late 2021 and early 2022 that we were able to sell for no profit, so that was exciting,” he quipped. “We also had some fun working out some loans with our lenders, reminiscent of the 2009-2010 period, so also a lot of fun.”

He said Meridian’s business also shifted from what was once a split between investments and development projects to “only development in this past year.”

“We saw the ground breaking for our largest build-to-suit project to date last year, and it’s going very well,” he said of a 95,000 square foot multispecialty project for Nexus Health in Sante Fe, N.M.

“At the same time, we’re mid-business plan on a couple of office-to-medical conversions that are more difficult than we imagined they would be when we took on those projects, with the lease-up in particular.”

Despite the challenges of conversions, TopMed also continues to see opportunities, according to Mr. Sofer.

“We continue to do conversions of retail space and office space to medical,” he said. “We’re also converting old supermarkets to surgery centers and clinical space.

Mr. Pollock of Meridian, who said he does not think interest rates will change much in the next year, said the firm is looking forward to the next year or so.

Although rising construction costs are causing developers and owners to raise rents to high levels, he said that firms doing value-add projects “can bring rents down to a much more compelling rate, which also helps with our thesis relative to driving down the overall cost of healthcare.

“We’re always on the lookout for opportunities like that, and this could be a really unique period for those types of projects. Like the others in this room, we, too, are seeing more project start to come onto the market.”

Not expecting much interest rate relief

Jay Meile, senior managing director with the Healthcare Capital Markets Group of Newmark Group Inc. (Nasdaq: NMRK), said he had spoken with an industry colleague who said he considered 2023 to be a “throwaway year, not only for our sector, but commercial real estate overall.

However, Mr. Meile continued, “I’m not sure we saw it that way at Newmark. Certainly, transaction activity was off … and volumes are down. But the transaction types that we were working on were different than in 2021 and 2020, when there were larger portfolio sales, more programmatic joint ventures coming together and just a lot of equity capital in the space.”

Mr. Meile, who was sitting in for his Newmark colleague and HREI board member Ben Appel, said, “There was free money, cap rates were diving and new, historic, low cap rates achieved somewhat daily. It was certainly an easier time to get transactions done.”

On the other hand, 2023 saw mostly sales of single assets and smaller portfolios, he said.

“A lot of the equity that had gone to the sidelines in 2022 continued to stay on the sidelines, and so a dearth of equity purchases continued to be part of what we saw in 2023. Certainly, liquidity constraints in the lender market continued in 2023 and continues into 2024.”

The sector remains an attractive one for investors, he asserted, because the fundamentals of the HRE sector are “great,” with occupancies at all-time highs and strong rental rates growth in many markets.

As far as Mr. Miele is concerned, transactional activity will likely rise during the remainder of the year.

“These fundamentals are of interest to investors who are comparing our sector to other sectors, like commercial office, and … I think we’re going to see the impacts of 2023 translate into more transaction activity in 2024. So overall, 2024, as we look at it and think about it from the standpoint of our pipeline, it’s very full.

“Yes, there are some large, very large portfolios in it, and those will sit and not go to market for a little while until the market continues to stabilize further. What is coming to market are smaller portfolios and individual assets. So that’s sort of a continued trend from 2023, but I think pricing has stabilized a little bit, and not to say that we’ll have compression this year, but some of the pricing that we saw in 2023 and 2022 was reactionary cap rates.”

He noted that the market is seeing a “normalization of pricing, and so we’ll see what might feel like a cap rate compression, really just kind of moving out some of the outliers and actually looking at what we think should be correct pricing given where debt’s pricing today. We’re going to see more equity in the sector. I think we’re already seeing it.”

He added that some of the potential sales in Newmark’s pipeline could involve health system sales, or monetizations, of assets.

“Several health systems are seeking to monetize large portfolios, and interestingly enough, I think some of those will be done more traditionally in sale-leasebacks, while some will be done in a more structured finance way, and there’ are some new structures that Newark has that will be utilized that would have been more classically done as sale-leasebacks.”

‘Playing the long game’

Darryl Freling, managing partner with Dallas-based MedProperties Realty Advisors, said the firm remains “very encouraged by the strong, sustained positive sector fundamentals that drive most of the reasoning behind our continuing to be bullish on the sector. That enthusiasm is tempered a little bit by some things … for example, physician-owned or PE (private equity) owned physician groups doing sale-leasebacks, which have impacted how we underwrite deals and how we go deeper under the hood in our underwriting. I think we all have to be sensitive to that.”

MedProperties went into 2023, he noted, with available equity and debt and looking for buying opportunities, “because of what we viewed as the Fed creating almost an artificial floor on cap rates for leveraged buyers, which most of us are.

“I think over the last 12 to 18 months, we’ve been successful in taking advantage of those opportunities. I think the last four transactions that we’ve closed have been (newly completed buildings) from developers who … just needed to recycle capital.”

Concerning interest rates, Mr. Freling foresees the possibility of one rate cut from the Federal Reserve, “and I don’t think just because rates might come down a bit, which may impact what you’re willing to pay for an asset because of your cost of debt, that will necessarily translate into a lot more debt being available.

“Most of the lenders that I’ve talked to said even when rates come down, they’re still going to be more selective on who and how they lend money. That’s because they’re dealing with a lot of other problems and a lot of other sectors. As a result, I think it will be a while before we see debt flowing back into the marketplace.”

Mr. Freling said the team at MedProperties is confident that, at some point, institutional capital will “come back into the marketplace, as our sector will remain highly attractive and debt capital will become more readily available. When that happens, you’re going to see cap rates start coming down given the dynamics in our sector. And when that happens? Perhaps in 2025, 2026, I don’t know. But we’re kind of playing the long game in terms of the acquisitions we’re making right now.”

Acquisition opportunities have also been hard to come by for TopMed Realty, according to Mr. Sofer.

“As for new product, we (haven’t) seen any new opportunities, I think because the (MOB sales) volume (has been) very low,” he said. He added that TopMed continues to at least “look at” at the properties put up for sale in the market, noting that 80 percent of the deals the firm reviewed never traded, in large part, he believes, because buyers and sellers most likely were not able to come together on pricing.

Devereaux “Dev” Gregg, executive VP of development with Charlotte, N.C.-based Flagship Healthcare Properties, said he expects the acquisitions “business to be off again” for the remainder of 2024, as it was for the firm in 2023.

“Luckily, my focus is on the development side of our business and we had a really good year in 2023,” he noted. “We finished two developments that we started, and in 2024 we are absolutely going to start … three new developments. One of those we’ve already started, and we are one or two leases away from starting a fourth project.”

He added that the firm has not had an issue with finding debt for its projects, as the smaller local and regional lenders Flagship tends to work with “for projects that we’re focused on in the 30,000, 40,000 and 50,000 square foot range are still lending to us.”

In addition, the type of health system clients that Flagship works with are still “actively talking to us about the projects. So that really hasn’t been an issue.

“We also continue to focus on ambulatory surgery centers, as two of the three projects we’ll start will be ASCs.”

The firm is also counting on an uptick in activity as a result of changing Certificate of Need (CON) laws in North and South Carolina, as well as potentially in Georgia.

“So, that’s a lot of business that we’re counting on, and expecting more starts” as a result of CON laws expiring or changing in certain states.

As far as interest rates are concerned, Mr. Gregg said he sides with the majority of sector professionals who believe “we will see one more year” of rates staying at or near the current level.

“I’m hoping we’ll see some relief in ‘25,” he ventured. “I doubt if we’ll have a lot of great things to talk about again until 2026.

“Despite the headwinds we’ve faced over the last 24 months or so, this still is the best sector to be in. I think we’re in for another good ride, even though it may not be until 2026.”

In the meantime, Mr. Gregg believes there will be some “opportunistic buys” in the market.

“There’s still going to be some debt coming mature where if you have cash and you have quick availability to close, you can actually pick up some purchases that will make a lot of sense. We’re certainly going to have our eyes open for that.”

‘Money wants to be in this space’

While the HREI board members talked plenty about the slowness of the market, especially on the acquisitions side, they said they remain thankful they are involved in the HRE sector.

Shane Seitz, senior VP with Chicago-based Ventas Inc. (NYSE: VTR), said he believes HRE is a “great business to be in, and we’ve all been in here for a long time. We went through the (Great Financial Crisis) in ‘08, and we watched this new market come in. Darryl (Freling) and I were talking at lunch, and we agreed that the capital is going to come back to this sector. As soon as there’s an opportunity, as soon there’s debt, we’re going to see a flood of capital and we’re just going to chase cap rates down again. Who knows if they go as low as they did (in recent years), but money wants to be in this space.”

Brannan Knott, an HRE veteran who joined CBRE Group Inc. (NYSE: CBRE) in February as an executive VP and who attended the meeting in place of HREI board member Chris Bodnar, vice chairman and head of Healthcare Advisory at CBRE, said that, in “stating the obvious,” rising interest rates had the biggest impact on the slowdown in the market over the last 18 months or so.

He added, however, that “I do think that they have, for the most part, leveled off. I’ll hold my breath on whether (the U.S. Federal Reserve Bank will raise rates again), but there is some certainty in the market, for now.

“And, what we have in our space is a very strong fundamental asset class, and capital and investors want certainty, and so we’re finally seeing this window start to open. It’s not fully back, but with (some certainty and strong fundamentals), that certainly helps lenders to open up…

“The recession-resiliency of our asset class, as we look through other sectors dovetail into healthcare, is something that I think is not properly weighted. When you fold into that the Black Swan event that was the pandemic, the rising inflationary pressures, the lack of reimbursements catching up with all those rising costs, I would that we’re now through the worst of it.

“I think that as we sit here today, we’re going to be in a very positive tailwind, taking that all into account from what those pressures of the last, you know, 24 months. A lot of it still resides within the Fed, the election, I don’t think, is really going to play a large part in our sector. And I can just say, you know, personally … that I think there’s going to be a decent amount of volume coming out this year. We’re not going to be back to the normal volume, just because the portfolio activity is not going to be there, but there’s going to be an uptick, and there are various drivers that are going to bring more product out to the market.” ❏

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