John T. Thomas, president, CEO and trustee of Physicians Realty Trust, recently shared his insights on current and upcoming trends regarding real estate investment trusts at the 2018 Building Owners and Managers Association International Medical Office Building & Healthcare Real Estate Conference May 10 in Houston.
The session, titled “Direct from the REIT C-Suite,” also included moderator Jay Miele, Managing Director of Hammond Hanlon Camp LLC; Danny Prosky, Managing Director of American Healthcare Investors LLC; and Todd Meredith, President and CEO of Healthcare Realty Trust.
The panel discussed what type of transaction volume and sellers they anticipate in the next several months, with many saying they expect to see all types of sellers from across the board and more transactions, but not as many sizeable ones as 2017.
Thomas noted, “At Physicians Realty Trust, we have the ability to invest, but we’re going to sell some assets, recycle some assets and continue trying to improve the overall quality of the portfolio. We’ll do some deals, but they’ll be reserved for the clients we’ve built big relationships with like Ascension and Baylor. We’ll be there for them.
“I think the complexion of sellers will look a lot like last year,” he continued. “If you want to sell your building, why wait? If you think the cap rates are turning, now is a good time to sell if you’re looking to recapitalize.”
The panelists said they expect portfolio transactions will still see competitive pricing in the coming months. One panelist said he expects premium pricing for large transactions and that cap rates will compress quite a bit as well for transactions involving only one or two high-quality properties.
“I agree with what others have said,” Thomas told the BOMA MOB conference audience. “There’s plenty of capital out there, but it’s more private based. I think it will take longer this year for the cap rate to adjust. I’ve said it all the time, that medical office is the best real estate for resiliency.”
With MOB prices at or near all-time highs, the panelists were asked if they’re seeing healthcare REITs diversify into other asset types. Several said they haven’t seen much diversification. In fact, it seems like just the opposite, they said, as previously more diversified REITs have recently narrowed their focus to fewer asset types. The panelists were asked if they expect the trend toward specialization to continue. One panelist noted that healthcare has been unique and that other sectors have long been specialized.
“The market is rewarding us for specialization,” Thomas observed, “and if the market gives us a different signal, we’ll change course.”
The group agreed that construction costs are increasing, which is setting the stage for more rent increases. “We’re seeing evidence of this,” Thomas noted. “Steel tariffs, labor shortages and a shortage of land are all contributing to this.”
When asked how the trend of reduced reimbursements are affecting the healthcare sector, the panel discussed a number of new models, including more inexpensive retail-oriented medical facilities.
“Everyone is now pushing everything out of big, expensive hospitals and treating patients in lower-cost care facilities,” Thomas said. “We still need hospitals, but we’re seeing fewer and fewer of them and more efficient outpatient care.”
The panelists agreed that the industry is on the leading edge of some dramatic changes in how healthcare is delivered. One panelist noted, however, that it will take a long time to change these healthcare models, and that they won’t replace the fundamentals of visiting your doctor and delivering quality care.
The group was asked what new disrupters are having an impact on real estate such as wearables. The panelists agreed that wearables aren’t yet having much of an impact but they might in the future. They said the increase in healthcare consumerism and the move to more Healthcare Savings Accounts (HSAs) is giving patients more spending power and the desire to shop around for their medical needs, but this is primarily for peripheral primary care services and prescriptions. One panelist said the dramatic population migration into cities is significantly lowering medical facility occupancy rates in smaller, rural markets, which is making it harder for them to succeed.
The panelists were asked to “flash back” five to seven years and discuss some of the key differences between then and now. One panelist noted there’s been no real change in what they like to acquire and they still look at the same characteristics. Another panelist noted that the competition is very different, but that has made the industry better and brought more transparency.
Thomas noted, “Five to seven years ago, the disrupters were innovative, non-traditional aggregators of assets. Today, a big change is foreign capital and the increased amount of private capital pursuing MOB assets.
“We’re also still in the very early stages of institutional ownership of MOBs. About $200 billion or so of MOBs in the U.S. aren’t owned by REITs or other forms of institutional capital. There’s a lot of fragmentation.”