Thought Leaders: JLL Healthcare Capital Markets Insights – November 2024

JLL Capital Markets

Medical Properties Group

Healthcare Capital Markets Insights – November 2024

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Debt Market Summary

• Well, here we are again. After an optimistic run in fixed income over the waning summer months, Treasuries have experienced a significant sell-off since the last JLL newsletter, up nearly 80 bps since the September FOMC meeting
• Rate volatility has been the hallmark of this market cycle and many participants are experiencing another bout of deja-vu
• This is not a rate newsletter, but macro factors were A) an expectations-beating labor and inflation print, B) Traders positioning ahead of an expected Trump victory and corresponding inflationary policies associated with a red sweep, most notably tariffs, and C) unwinding of safe-haven bets associated with election outcome uncertainty
• Why is this time different?
  • Lender liquidity is the highest it’s been since the rate hiking cycle began in 2Q2022
  • The market for MOB lending is more diverse than it’s ever been, part out of necessity as the banks retrenched, and part due to sector rotation as new office loans are redlined. LifeCo, Private Credit, and CMBS, individually and collectively, have increased their share of all MOB loans to record highs for 2024
  • Bank liquidity has picked up as payoffs & expected payoffs increased significantly. As such, most banks are actively quoting deals, with renewed optimism for 2025 pipeline, although we are still seeing the local/regional bank market challenged due to overexposure to commercial real estate
    • A red sweep of congress is expected to further improve bank liquidity, as regulations are rolled back
  • Life Co allocations reset in 2025 – Q1 expected to be a robust year given increased mandates
  • Debt Fund pricing continues to improve, with best of best competing with bank-like spreads, thanks to continued improvement in back leverage liquidity
• Yield curve inversion is reversing. If continued, the reliance on fixed rate deals to make leverage accretive to current MOB cap rates lessens. This reduces volatility associated with the fixed income market, susceptible to the wild swings of traders between application and closing of a real estate deal, and ties more closely to the Fed Funds policy, which by mandate is more clearly signaled to the market
• Spreads are tightening. Though not enough to make up the ground lost to rising indices, loan spreads have tightened consistently through 2024 and are once again accommodative to positive leverage scenarios

Investment & Equity Market Summary

• JLL’s Medical Properties Group has seen a surge in client requests for valuations and strategy analysis over the past ~90 days as potential sellers evaluate disposition plans heading into 2025
• New liquidity cycle forming fueled by bullish economic view concurrent with ODCE core fund values approaching market values implying redemption queue declines: investor FOMO is real
• New domestic and international institutional capital coupled with ultra-high net worth family office capital evaluating opportunities for scalable investment in the healthcare sector; ODCE funds increasing allocations to alternatives
• Core profile assets continue to garner cap rates ~25-50 bps inside of borrowing costs; JLL has advised on several mid-5 cap rate sales over the past 18 months
• Investors constantly grappling with terminal valuations; the long end of the yield curve is now projected to bottom out ~80 bps higher compared to ~60 days ago
• Healthcare investment fundamentals remain strong with significant positive net absorption in most major U.S. markets, and construction starts down approx. 50% vs. the 2018-2022 average; implying potential for outsized sector rent growth
• JLL’s health system clients are actively evaluating future space requirements and considering alternatives ranging from development RFP’s, land banking, office to medical conversions, and alternative financing structures
  • As an example, JLL recently advised on structuring and execution via 501c3 entity of a bond placement to fund a transformational public-private ~$500MM healthcare developmen
• With the election in the rear view mirror, rates anticipated to lower and capital anticipated to increase, there is significant optimism for strong transaction volume in 2025