TWITTER CHAT: Eric Johnson Shares Top 5 Trends in Healthcare RE

Transwestern’s National Director of Healthcare Eric Johnson took a time out from overseeing development, leasing and investment sales for healthcare clients nationwide, to chat live with CPE editors about the latest news in healthcare real estate in Twitter style of 140 characters or less per Tweet.

CPE: Welcome to CPE’s Twitter Chat. Today, we have with us Eric Johnson.  Eric oversees Transwestern’s national healthcare services team located in 17 major cities across the U.S. We will be chatting live with Eric about the top five healthcare trends in real estate.

Johnson: Thanks for having me at CPE chat! I’m excited to dive into what’s happening in healthcare real estate!

CPE: Eric, what are the top 5 trends you’ve seen lately in healthcare real estate?

Johnson: The first major trend is a shift in focus by major hospital systems as a result of the Affordable Care Act. Hospitals have to focus more on balance sheets to account for diminished reimbursements from Medicare and Medicaid. They are also investing in technology as a way to improve services and maximize resources. The result is a shift to maximize efficiency through space planning in order to see more patients in their existing space. The second major trend is the increasing number of independent physicians selling their practices to hospital systems.  ACA mandates that hospitals & physicians invest in new technology & equipment like electronic records. This forced many physicians to become employed by or to secure affiliation with hospitals to weather the storm. Hospitals are much better suited financially to invest in new medical equipment & electronic records.

Jennifer Dawson (Twitter follower): How is the ACA affecting the hospitals themselves? Have they changed bed counts & use of space?

Johnson: Jennifer, great question. The trend we’re seeing is to build less beds and instead expand outpatient facilities like emergency clinics

Cameron Maness (Follower): Have you seen the ACA affect on-campus medical-office-building leasing?

Johnson: Cameron, yes, as hospitals recruit more physicians thrugh the employment model occupancy in “on campus” facilities has increased. In addition, cap rates have dropped considerably for these types of assets due to this trend.

CPE: Fantastic questions from our followers. Keep them coming!

Johnson: The third trend I’ve seen is that hospitals have consolidated newly employed physicians into larger multi-specialty groups. This allows hospitals to lower real estate costs and maximize efficiency by seeing more patients in one space. Seventy percent of all medical leases we handled in 2013-14 involved hospitals or employed physician groups, reflecting this trend.

Johnson: Hey Mike, that’s a really good question. The answer is definitely. Since 2012 we have seen an increase in foreign investment capital into our sector. The main challenge they have is finding the right sponsor to assist them in finding deals. Because many of our sellers are hospitals/medical users, they require the buyer be experienced in operating MOBs. Foreign investors look for stabilized cash flow, so they’re drawn to hospital-sponsored on-campus medical assets.

Dawson: What are the hottest healthcare product types for investment?

Johnson: Jennifer, on-campus MOBs & post-acute hospital facilities like inpatient rehab and skilled nursing that have partnered with a regional or national healthcare system. Single-tenant NNN medical facilities are also gaining momentum.

The fourth trend I’ve seen is an increase in medical office building sales nationally. The physician employment model has shifted the healthcare tenant base from personal guarantees to Bonded Hospital Credit. That improved credit rating makes many MOBs a much more attractive and stable investment. In fact, MOB sales volume has more than doubled from the first quarter of 2012 to the first quarter of 2015 from $4 billion to $10 billion in sales. In the last 12 months alone, MOB sales volume is up 58 percent according to Real Capital Analytics. The number of properties sold has jumped 72 percent and average price per square footage is up 42 percent in the last 12 months. Cap rates have compressed since the ACA and are currently at an average of 7 percent.

The last trend is the proliferation of preventive care, which we’ve touched on with our audience questions. Health facilities have been created to educate and treat minor health symptoms in a more cost-effective setting. Hospitals are building more outpatient facilities like emergency clinics, urgent-care facilities, imaging & surgery centers. Most of these outpatient facilities are located in retail centers, which better serve surrounding residential populations. These centers reduce demand for general care in an acute setting, lightening the burden on the healthcare-delivery system.

CPE: What was an average deal size before the ACA? What is the average size now with the new physician employment model?

Johnson: Before the ACA, medical office leases were typically in the 2,500-3,000 square-foot range. Now, average MOB leases are 7,000-9,000 square feet, but we see multi-specialty leases hitting 75,000-100,000 square feet.

CPE: What five trends do you expect to see in the medical office sector in the near-term?

Johnson: First, I expect to see the robust M&A activity continue. Successfully adjusted hospital systems are seeking acquisitions to increase market share. Constrained health systems are seeking to secure affiliations with other hospital systems serving different patient populations. This structure provides a less expensive way for hospitals to expand market coverage, while in turn allowing them to procure more attractive reimbursement contracts with health insurance providers. Next, leasing absorption should increase for the third consecutive year as we move further from ACA implementation. New construction will increase as hospitals add on-campus MOBs to facilitate additional physician practices and recruitment. We expect a 2 percent rent growth in 2015 as the fastest-growing markets will be tempered by consolidation in over-supplied markets. MOB sales will remain robust as interest rates remain low and hospitals continue monetizing MOBs to fund future growth. As more hospitals monetize non-core assets, we will see new investment sales, management  and leasing opportunities.

CPE: Since cap rates have been compressing, how will MOB cap rates be impacted by interest rates?

Johnson: The medical office sector will fare well comparatively because the majority have 2-3 percent annual bumps built into the lease structure. On top of that, the swing from personal guarantees to bonded hospital credit will help preserve low cap rates.

CPE: Eric, thanks so much for lending your healthcare RE expertise to CPE and its followers.

Johnson: Thanks for giving me the opportunity to promote this growing asset class within commercial real estate , and thanks to our followers for the questions!