Healthcare is among the new hot investment assets, following the shake up from the pandemic. This year, healthcare pricing is nearing record levels, and cap rates are trending down, according to Scott Briggs, Senior Director and Partner at Stan Johnson Company. Briggs will speak on the topic at the upcoming GlobeSt.com Net Lease conference on October 28, 2021.
“During the pandemic, with 1031 exchanges already underway and dry powder at all-time highs, that affinity became necessity as many net lease tenants sought rent relief from landlords as governments initiated public shutdowns relief—a move that sent investors and lenders reeling at the potential of what was to come as the unknown played out,” Briggs tells GlobeSt.com. “This dynamic convergence of needs caused demand for healthcare product to surge which sent prices even higher given the certainty of continued rental payments afforded by most healthcare users as net lease tenants.”
The accelerated demand was true of many trends during the pandemic. In the net lease space, industrial is the asset that was really set on fire. “The pandemic accelerated already prevalent trends in the net lease space,” Briggs says. “Pre-pandemic, net lease investors exhibited an evidenced affinity for net lease product that was well-aligned with technological advances by market disrupters such as Amazon and other e-commerce providers or net lease product that was well-insulated from macroeconomic movements.”
However, while industrial demand may be getting most of the attention, Briggs says that activity in the healthcare space is rivaling the monster asset class. That’s because industrial has a higher barrier-to-entry for investors. “Demand for net lease industrial product might be slightly higher, but deal sizes often preclude the average net lease investor from participating in that segment of the market directly. The accelerated trend in healthcare has not only sustained since the start of the pandemic, its pace has continued,” he adds. “Demand for most of the net lease healthcare product that we are listing and marketing today is as high as I can remember it being, and cap rates continue to trend downward.”
Investors entering the market could have to navigate some regulatory challenges ahead, however, that could impact momentum. “The current topic of concern pertains to changes in Medicare or changes in tax policy that might cause a dynamic shift in supply and/or demand in net lease healthcare,” says Briggs. “This unease has yet to cause a noticeable sobering effect to the broader healthcare party, however. I anticipate the 2022 results—at least from a fundamental valuation perspective, as opposed to a pure volume or transaction count perspective—to exceed those experienced in 2021.”
In fact, Briggs expects healthcare activity to remain strong well into the future, saying, “Until there is some systemic and dynamic geopolitical or macroeconomic shift and a reversal of the interest rate and cap rate trends we are experiencing, healthcare net lease will remain a priority for most private and institutional buyers for the foreseeable future.”