The idea of investing in healthcare real estate is intuitively appealing. The healthcare and real estate sectors often outperform the S&P 500. Upon closer examination, a combination of demographic and economic factors supports the growth of healthcare real estate.
Aging Population Supports Strong Fundamentals
Most investors are aware that an aging population implies a growing demand for healthcare, but they often do not realize the full extent of that demand. As is well known, the aging baby boom generation is currently increasing the percentage of the population over 65 years old. The U.S. Census Bureau estimated that the proportion of older people in the population would increase from 12.8% in 2000 to 16.4% in 2020. However, the Bureau also projects that those over 65 will rise to 20.7% of the total by 2040.
Older people are dramatically more likely to visit doctors. According to the U.S. Centers for Disease Control and Prevention, individuals over 65 are approximately three times more likely to visit a doctor than those under 45. Moreover, older people see a doctor's office nearly twice as often as Americans between the ages of 45 and 65. All those doctor's office visits add up to a substantial increase in the demand for healthcare real estate.
The Rise of Outpatient Care Drives Growth
Younger consumers are driving the shift toward outpatient care, prompting another significant change in healthcare real estate. Optometrists and dentists were the first doctors to offer their services at more accessible offices. Now, urgent care facilities are springing up to provide convenient outpatient care.
Overall, outpatient care increased from under 1,500 visits per 1,000 people in 1994 to over 2,000 by 2014. During the same period, inpatient admissions decreased from approximately 120 per 1,000 people to around 100. Today's patients are increasingly seeking outpatient treatments for conditions that once required hospital stays. This change has significant implications for investors, as outpatient medical offices are generally easier to invest in than large hospital buildings.
Medical Office Buildings in High Demand
The demand for medical office buildings increased as demand for commercial real estate and other office buildings faced challenges. Commercial real estate prices were depressed by competition from e-commerce, while telecommuting had a significant impact on most office buildings.
Many consumers, particularly the growing elderly population, are hesitant to consult doctors online. Crucially, doctors must provide a variety of medical services in person. As a result, the price of medical office space went from slightly over $200 per square foot in 2007 to around $300 per square foot by 2017, according to JLL Research. This growth took place during a period when most office real estate prices were still recovering from the Great Recession.
Recession-Resistant Real Estate
Besides a generally positive growth outlook, healthcare real estate also performs well during economic downturns, also known as recessions. Revista's statistics show that medical office vacancies increased from approximately 9% in 2007 to a peak of nearly 11% by 2010. During the worst recession in a generation, medical office vacancies increased by less than two percentage points. Moreover, Revista also found that medical office rental prices declined by less than 10% during the recession.
Growing Opportunities for Investors
Historically, hospitals and non-profit health systems owned the majority of medical office buildings, and they still held 51% of them as recently as 2014. However, investors already possessed a growing number of medical office buildings. REITs held 11%, while private investors owned 19%. Those statistics make it clear that private capital controlled most medical office buildings available to investors.
