Healthcare Properties: A Viable Investment Alternative

December 9, 2019

Property investors typically focus their investments on commercial and residential real estate. In the U.S., however, sustained demand in healthcare properties has made it a desirable investment alternative for real estate investors who see its long-term viability and importance to the aging American population.

According to research by Jones Lang LaSalle, in 2018, medical building sales in the country reached almost $10 billion (nearly double from 2014). This is because a lot of institutional investors have observed the consistently solid performance of healthcare property returns in the past few years. We predict this trend will continue well into the near future as healthcare real estate continues to generate more interest.

The volume of investment is representative of the general shift in the direction of commercial real estate in the last ten years, as investors sought returns in an environment with steadily low interest rates. The sustained demand in commercial real estate has encouraged property investors to focus on alternative real estate segments such as student housing and healthcare.

The demand for medical properties

Typically, even institutional property investors did not find investing in hospitals and other types of medical office buildings an attractive idea, especially since healthcare properties serve a too highly specialized function.

However, the aging baby boomers have been heavily spending on healthcare this past decade or two, thereby altering the perspective on medical property investment and ultimately bringing them into the mainstream of commercial real estate.

According to the U.S. Census Bureau, all American baby boomers would be passing the 65 years of age threshold by 2030. Then, in five more years, 65-year-old Americans would outnumber 18-year-olds in the population. By 2060, about 95 million Americans (or one in four people) would be above 65 years old, and 20 percent of that group would be over age 85.

As we continue to innovate and hit new technological milestones across different industries, medical advances would enable doctors to even prolong the average human lifespan. Their ability to remotely monitor and supervise patient care, the availability of driverless automobiles and improved automated public transportation, and better home care options (perhaps with the assistance of AI) could potentially keep more baby boomers living for longer. Of course, such radical living enhancements could increase demand for outpatient facilities as more patients would opt for these rather than long-term care facilities.

Moreover, we've noticed that convenient healthcare is already a growing consumer demand, and has spurred the development of outpatient facilities, including doctor clinics, same-day surgery centers, and typical medical buildings. Currently, the growing number of insured members of the American population is also helping fuel such a demand. Overbuilding, however, does not appear to be a concern for investors as new development is not expected to exceed demand.

Also, if American healthcare moves toward a single-payer system, access to medical care would increase, thereby fueling further demand for the type of real estate that would accommodate healthcare facilities. Of course, such a change would entail a bigger emphasis on cost reduction, which could then result in greater demand for medical care space with lower rental rates.

Regulatory factors bring a certain degree of risk to healthcare property investment, but, however you may look at it, it's our prognosis that potential developments are likely to increase healthcare demand so that the need for more clinic and hospital space is inevitable.

Future opportunities

Along with the growing population, healthcare employment growth has also been quite consistent in the past few years. This is because more Americans are insured today and a substantial number of people (baby boomers, in particular) continue to age, thereby requiring the services of healthcare professionals. And with technological innovations impacting all sectors, including the medical field, all of these things combine to continuously fuel the need for more healthcare facilities.

This is why at TYG Commercial Real Estate, we advise investors seeking our counsel to look into investing in healthcare properties. If you have any questions about commercial real estate, don’t hesitate to get in touch with us.

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