In its 2014 State of the Market Survey, law firm DLA Piper asked 158 respondents, including real estate investors, advisors and managers, which industry sector presents the most attractive opportunity for investors during the next 12 months. For the first time in the last five surveys, going back to 2005, the multifamily sector was knocked out of the top spot by a rising force in the market of healthcare properties.
The Washington, DC-based law firm described the swap as the end of an era for multifamily, which had outpaced all other asset classes by a wide margin in the previous surveys. But healthcare’s rise in the rankings does not signify less interest in apartments, explained Jay Epstien, chair of DLA Piper’s real estate practice. While multifamily remains appealing, healthcare is fueled by a number of demographic factors, including the aging population and the increased access to healthcare services with the introduction of the Affordable Care Act.
The report defines healthcare assets as hospitals, medical office buildings and assisted-living facilities, stating that the sector’s rank in this year’s survey “clearly reflects the rivers of money running through the healthcare industry.”
Indeed, the river has been flowing, as evidenced by recent transactions. In late August, Harrison Street Real Estate Capital sold a 12-property healthcare portfolio for $283 million, marking the largest healthcare exit for the Chicago-based firm. Earlier this year, NorthStar Realty Finance purchased a $1.05 billion healthcare portfolio, comprised of 43 private-pay senior housing facilities and 37 skilled nursing facilities.
While big portfolio transactions are becoming highly sought-after, more managers are seeking capital for funds with a healthcare focus. Kayne Anderson Real Estate Advisors launched its fourth vehicle, Kayne Anderson Real Estate Partners IV, in early September. The Boca Raton-based real estate arm of Kayne Anderson Capital Advisors plans to use the $1 billion fund to increase its focus on healthcare properties. Also last month, PERE profiled Columbia Pacific, a firm backed by 40 years of experience in the healthcare real estate business, which brought on its first capital raiser and is planning its debut funds.
The sector is heating up among the investor community as well. In May, the $83.41 billion State of Wisconsin Investment Board selected Toronto-based Bentall Kennedy to manage a $150 million US medical office separate account, marking the pension plan’s first foray into the sector.
Epstien noted that although the activity in the healthcare market indicates mainstream appeal, it is still considered a specialty asset class due to the level of attention needed on the operations side. “It’s a property class that requires some real expertise to run,” he added.
While respondents to the DLA Piper survey were enthusiastic about healthcare’s future, the report noted that the asset class is still not producing yields as high as some other less-favored property types. The report included data from Green Street Advisors, which stated that the average cap rate on healthcare properties was 6.82 percent in July, down from 7.18 percent a year earlier, but still nearly two percentage points higher than the average yield on an office or apartment building.
Nevertheless, Epstien believes that interest in the new reigning property type is not likely to fade any time soon. As the population ages and as more people obtain greater access to healthcare, our conclusion is that demand is going to be predictable and consistent on a long term basis, he said.
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