1. Year of the portfolio
2021 witnessed record MOB portfolio transactions with 19 portfolios greater than $100 million closed or closing in December, totaling $7.4 billion. This high level of activity contrasts with 2020 that had nine portfolios and $3.2 billion of volume, consistent with most prior years. Another new trend is recapitalization - nine of the 19 portfolios in 2021 were recapitalization of existing operator holdings, many with go-forward equity commitments, on an exclusive and non-exclusive basis. As institutional capital invests in scale, market participants are highly dependent on leveraging the critical medical office specialist operators to manage assets and deploy capital.
2. Outsized fundraising and new entrants
The allocation of capital to healthcare real estate has exceeded the spectacular overall growth rate in global allocation to real estate. The investment thesis for medical office was proven again during the pandemic, with reliable income and tenancy, supported by favorable demographics that drives demand for healthcare services. Capital sources and new entrants are seeking refuge in this “safe” asset class. For example, Harrison Street, with a focus on healthcare and other alternatives, raised $2.5 billion in its eighth opportunistic fund in 2021 with buying capacity of $8 billion, exceeding the $1.6 billion equity raise in its seventh opportunistic fund in 2019. Notable new entrants of scale in 2021 that have progressed successfully through the “white paper” stage or have meaningfully increased allocations to healthcare include AEW, Nuveen, KKR and Gulf Finance House, to name a few.
3. Debt capital is abundant
Financing markets are highly liquid for healthcare real estate loans across the risk spectrum. Supported by strong sector performance in medical office during the pandemic, lenders are increasing allocations to healthcare properties. New lenders are entering the healthcare space after kicking the tires. Accretive financing terms and continued low interest rates have been pivotal to holding up investors’ target levered return requirements in the past year. This is also a reason that private capital, using hefty doses of leverage, have prevailed competitively over healthcare REITs with more conservative capital stacks.
4. Cap rate compression
All of the factors above are driving cap rates lower for medical office and other healthcare facility types - a phenomenon that has occurred consistently for several years - and just when you think they can’t go any lower! Core pricing for MOB is now sub-4 percent cap rate with stabilize-to-core assets solving to low 5 percent stabilized return on cost. Core-plus cap rates have also compressed to the 5 percent cap rate range. JLL estimates that core and core-plus cap rates have gone down 100 basis points in the last 24 months. At the same time, levered investor returns held up relatively well for private buyers and benefited from lower implied exit caps. All of this has fueled even more interest in healthcare, offering superior relative yield to other hot property sectors such as industrial and multi-family.
5. Growing acceptance of non-MOB in search for yield
With the overwhelming amount of capital in the space combined with cap rate compression in medical office, investors searching for yield are migrating into other healthcare property types in the continuum of care including inpatient rehabilitation facilities (IRF), micro-hospitals, behavioral health and even short-term acute care hospitals. Investor holdings of these properties continue to grow, building investor confidence and acceptance. IRF has become a favored asset class within healthcare as the reimbursement environment has been stable and operations through COVID remained strong. Liquidity for IRFs has grown through single asset trades and as a portion of larger portfolios. There is a significant new development pipeline in IRF that has attracted many traditional MOB developers.
