The idea of investing in healthcare real estate is intuitively appealing. The healthcare and real estate sectors often outperform the S&P 500. When we look closer, a combination of demographic and economic factors supports the growth of healthcare real estate.
Aging Population Supports Strong Fundamentals
Most investors know that an aging population implies a growing demand for healthcare, but they do not realize the 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 elderly would increase from 12.8% of the population 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.
The elderly are dramatically more likely to visit doctors. According to the U.S. Centers for Disease Control and Prevention, those over 65 are about three times more likely to visit a doctor than people under 45. What is more, the elderly go to a doctor’s office nearly twice as often as Americans between 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 movement toward outpatient care, which is prompting another significant shift 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 that same period, inpatient admissions fell from around 120 per 1,000 people to about 100. Today’s patients are seeking outpatient treatments for conditions that once required a hospital stay. This change has important implications for investors because outpatient medical offices are much 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 impacted most office buildings.
Many consumers, particularly the growing elderly population, are reluctant to see doctors over the Internet. 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 recessions. Revista’s statistics show that medical office vacancies went from about 9% in 2007 to a height of nearly 11% by 2010. During the worst recession in a generation, medical office vacancies increased by less than two percentage points. What is more, 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 most 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.