Capital Markets and the Impact on Healthcare Development and Acquisition
The Healthcare real estate space is a dynamic landscape shaped by various economic factors and advancements in the healthcare industry. A key aspect that significantly influences acquisition strategy industry wide is the state of capital markets. The current instability in the capital markets has made underwriting assets and acquiring medical buildings more challenging than in recent years. In this article, we delve into the insights shared by Mark Davis, on how capital market changes have influenced his company strategy over the past year, future developments in the sector, Davis’ role in driving healthcare innovation, and the potential risks and rewards associated with healthcare development and acquisitions. Let’s explore how these factors interplay in shaping the future of healthcare development.
Over the past year, we’ve observed an economic landscape characterized by change— the looming specter of recession, persistent inflation, and the continued rise of interest rates. These dynamics have sent ripples through the debt markets, requiring more creativity in our acquisition strategy. Gone are the days where cap rate compression would always make an investment a success. Uncertainty within the debt markets has influenced asset pricing, property appraisals, and consequently re-financing. Furthermore, the significant bid-sell gap that persists has exacerbated the shortage of available medical buildings on the market. Owners are holding onto these properties in the hope of more favorable market conditions. Due to these factors, we foresee a reduction in acquisitions this year. However, amidst these challenges, the fundamentals of the healthcare sector remain strong, and we have continued to see a steady demand for space from health systems and physician groups. In the aftermath of the COVID-19 pandemic, providers have realized the need to diversify and expand the services offered. With this realization, we have observed both healthcare systems and specialty groups seeking expansion opportunities in existing buildings as well as ground-up developments, with a strategy focused on consolidating providers together to create a more holistic approach to patient care. One example of this is the recent 610 Medical development in Brooklyn Park. This development has united two significant healthcare entities: Allina Health and Surgical Care Affiliates (SCA). Through their partnership, a new patient-centric delivery model has emerged. This model empowers Allina Health and SCA to seamlessly cater to the entirety of outpatient surgical care demands, while simultaneously offering patients a convenient and more cost-effective solution.
Looking forward, we foresee interest rates stabilizing and the bid-sell gap coming to a healthy equilibrium over the next 24 months. This is expected to increase the supply of medical buildings available in the market. We’re also collaborating with trusted lenders, using debt swaps and caps to hedge against the downside risk of interest rate changes, positioning our portfolio for long-term success. As a full-service Healthcare Real Estate company, our expertise in healthcare leasing, acquisition, development, property management, architecture, and strategic planning strengthens our position to adapt to changing market conditions, allowing us to thrive even in a relatively down market. However, the overall landscape continues to change and at a rapid pace, making it all the more important for our team to adapt and seek out innovation in our industry that will bring increased value to our clients.
Innovation is not just a buzzword; it’s the heartbeat of healthcare’s future. Capital investments play a vital role in driving advancements and innovation in healthcare. This leads to improved patient care, healthcare delivery, and an improved healthcare ecosystem. At Davis, we take pride in developing and acquiring Class A Medical Buildings that prioritize delivering top-notch healthcare services to the community, and innovation is at the forefront. Telehealth, remote monitoring, and data sharing are some of the newest paradigms the industry is turning to. Telehealth’s potential to broaden access to care is an exciting prospect, and we envision its seamless integration with physical healthcare spaces. The synergy between these innovations will redefine healthcare delivery and continue to shape the patient journey. As we forge ahead into the future, another prominent focal point regarding innovation will be around artificial intelligence (AI). At Davis, we closely monitor the implementation of AI and its uses across the real estate industry. We believe that effective integration of AI will enhance operational efficiency and contribute to future successes, especially as it relates to tracking and measuring ESG efforts and the effectiveness of smart building technology. Sustainability stands as the cornerstone of a successful future within the built environment. At Davis, we believe that real estate holds the potential to steer the transition towards a low-carbon economy. This journey involves utilizing materials with lower embodied energy and leveraging every building-related choice to enhance efficiency and minimize emissions wherever feasible. Continuing our unwavering stance at the forefront of sustainability, we implement environmentally conscious elements such as green walls and prefabricated interior solutions. Yet, our dedication extends beyond surface aesthetics. Through the use of features like fireplaces and touch screen directories, we curate a welcoming experience tailored to meet the needs of our clients and their patients. Our commitment to sustainability, patient-centered excellence, and staying at the forefront of emerging trends positions us favorably to overcome challenges and seize opportunities in the evolving healthcare real estate landscape.