by Dan Rafter
Gino Lollio, associate vice president of investments in the Chicago office of Marcus & Millichap, expects more sales, leases and new construction in the healthcare real estate market. There are plenty of reasons for this – an aging population, patients who want treatment closer to home, the impact of the Affordable Care Act – and Lollio, who studies this market, spoke about them with Midwest Real Estate News.
Here’s what he had to say about this important commercial real estate sector.
Midwest Real Estate News: Let’s look at the broad picture first: Do you expect to see more activity in the healthcare real estate sector through the rest of this year and into next?
Gino Lollio: I do. You just have to look at the aging population. Those over the age of 65 visit their physicians’ offices two times more than do those under the age of 65. Our country’s population is getting older, so we’ll be seeing more visits to physicians’ offices and care centers. That increase in demand alone spur more activity in this sector.
MREN: And there are other factors that would spur more new construction, sales and leases in this sector, right?
Lollio: The aging population coupled with the Affordable Care Act will definitely increase demand. Millions of non-elderly people who previously were uninsured are now receiving insurance through the Affordable Care Act. That has also led many investors throughout the whole gambit — institutional, private REITs, private investors, high-net-worth individuals – to enter the healthcare market, to invest in healthcare real estate.
MREN: How strong, then, is demand for healthcare real estate today?
Lollio: There has consistently been a lower supply of real estate in this sector, which also happens to push prices and values. There has never been an overabundance of supply, but the demand has always been there. And demand continues to get stronger.
MREN: What kind of building type are health systems looking at when they want to expand their networks by taking over existing properties?
Lollio: We are seeing more consolidation in this industry. These larger entities are looking at the real estate that is now under their control and determining where they need to make changes. Most of the spaces that big companies are targeting when they take over other systems tend to fall into what we call the late-vintage period. These buildings tend to be more consumer-centric with larger floor plans. They allow for some of the technology advancements that health systems are seeking today. Then there are the properties that were built in the ‘70s or ‘80s. They are not obsolete, but they do need some rehab work to bring them up to modern standards. But first and foremost, we are seeing tenants and health systems focusing on late-vintage or modern facilities when they are acquiring or moving into properties.
MREN: What do patients want to see today from their healthcare providers in actual physical spaces.
Lollio: The urgent cares and free-standing emergency departments are what patients want to see. These are more like something that looks like a retail location. They are easier to get to. You don’t have to go with a full-fledged hospital visit. There is a trend toward more outpatient services. Patients want to be able to get in and out quickly. This type of care can also be more cost-effective for both patients and the providers. There is a cost benefit on both sides. It’s become the hub-and-spoke model during the last few years. Certain services can be provided in outpatient care facilities. It’s also a way for the healthcare system to expand its brand and its market area. Then if any care is needed in a more invasive or serious type of service, systems can bring them into campus facilities in the main hospital.
MREN: What are some of the big advantages to investors when it comes to healthcare real estate?
Lollio: The borrowers’ cost of capital, debt in this case, is still historically low. And that coupled with the strong rates of return that come with healthcare real estate makes this a strong sector for investors. You are seeing a higher rate of return than you would see in other commercial sectors. You also tend to get tenants with stronger credit characteristics in healthcare real estate. When investors have strong credit behind their rent roll, it allows them to borrow capital at lower rates than if they did not have that credit enhancement.