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GLOBALHEALTHCARE SERVICES
2014 Healthcare Real Estate Survey Results
2
April 30, 2014
Re: 2014 BOMA Healthcare Real Estate Trends Survey
Dear Respondents and Attendees:
Thank you for your responses to the survey. We’re all interested in healthcare real estate trends and want to stay up to date. This letter is attached to the booklet regarding the BOMA Healthcare Real Estate Trends Survey and gives a current scope of perspectives. The Newmark Grubb Knight Frank Global Healthcare Services team appreciates the opportunity to provide these survey results to the respondents and attendees at the 2014 BOMA International’s Medical Office Buildings and Healthcare Facilities Conference.
The past year has been challenging for healthcare real estate managers and professionals. With the Affordable Care Act (ACA) creating an opportunity for change and efficiency, our experience has never been more important. Our team grew significantly in 2013 and we sold more than $500 million in medical office and hospital transactions. In addition, we took on more than 60 million square feet of hospital and health system transaction management and advisory services. Our mission is to assist the healthcare industry in stabilizing and lowering the cost of healthcare through more effective and efficient uses of medical real estate.
Our team provides clients with a single-source solution for every phase of acquiring, financing, developing and disposing of healthcare real estate. Utilizing a consultative approach and leveraging our national resources and global reach, we assist hospitals, health systems, physician groups, investors and developers in effectively managing their healthcare real estate operations and portfolios, creating and executing long- and short-term strategic plans that deliver reduced occupancy costs, increased efficiency and utilization, greater access to capital, ultimately to maximize value.
The team comprises real estate transaction and consulting professionals with more than 25 years of experience serving hospitals, health systems and medical office building owners throughout the U.S. and across the globe. Our advisors understand the impact of the challenges that arise through hospital affiliation strategies, healthcare reform, demand for healthcare assets in the capital markets and constantly evolving regulatory issues. We have the expertise to advise providers through these complicated changes, compliance and regulatory issues, capital requirements and real estate strategies.
We welcome your questions and comments.
Warm Regards,
Garth Hogan Todd PermanExecutive Managing Director Executive Managing DirectorGlobal Healthcare Services Global Healthcare ServicesDirect: 949.608.2115 Direct: 404.806.2510ghogan@ngkf.com tperman@ngkf.com
www.ngkfglobalhealthcare.com
Welcome LetterGlobal Healthcare Services
3
0 Client Logo
GHS Survey Respondents
33%
20%
47%Advisor / Broker
Healthcare System and Hospital Administrators
Healthcare Investors
There were 128 respondents from 28 states across the country, including a good cross-section of healthcare providers, investors and brokers.
Respondent States
Respondents ProfileGlobal Healthcare Services
Healthcare OverviewGlobal Healthcare Services
About Newmark Grubb Knight Frank
A Global Leader in Commercial Real EstateNewmark Grubb Knight Frank is one of the world’s leading commercial real estate advisory firms. We provide a fully integrated platform of services to prominent multinational corporations and institutional investors across the globe, as well as to owners and users of real estate on a local, regional and national level.
Headquartered in New York, Newmark Grubb Knight Frank and London-based partner Knight Frank operate from more than 320 offices in established and emerging property markets on five continents. Our global platform enables us to effectively serve the property requirements of tenants, landlords, investors and developers worldwide.
Strategic Thinking, Effective ExecutionNewmark Grubb Knight Frank’s integrated services platform provides clients with a single-source solution for every phase of occupying or owning a property - from strategic planning, site selection, design, construction and initial occupancy to ongoing cost-effective operations and dispositions. Taking a consultative approach and leveraging our global reach, we assist corporations, investors and owners in effectively managing real estate operations and portfolios, creating and executing long-and short-term strategic plans that deliver reduced occupancy costs, increased efficiency and, ultimately, maximized value. Our full range of services includes leasing advisory, global corporate services, investment sales and financial services, property and facilities management, program and project management, consulting, and appraisal and valuation services.
Newmark Grubb Knight Frank’s brokerage professionals have broad experience across all commercial property types, including, office, industrial, retail, multifamily, hospitality and healthcare. We work closely with tenants and landlords to assess the impact of real estate trends and how the broader business climate may affect an organization’s critical business needs and overarching goals. Whether a single location or multiple global facilities, we help our clients gain a more thorough understanding of their operating environments and identify where real estate and business optimization opportunities exist. For clients with real estate capital concerns, our NGKF Capital Markets provides strategic capital solutions for our private, corporate and institutional clientele, maintaining direct relationships with a broad investor and lender base, including local, national and offshore entities, both public and private.
A Strong FoundationBGC Partners is a leading global brokerage company servicing the financial and real estate markets. Products include fixed income securities, interest rate swaps, foreign exchange, equities, equity derivatives, credit derivatives, commercial real estate, commodities, futures, and structured products. BGC also provides a wide range of services, including trade execution, broker-dealer services, clearing, processing, information, and other back-office services to a broad range of financial and non-financial institutions. Through its BGC Trader and BGC Market Data brands, BGC offers financial technology solutions, market data, and analytics related to numerous financial instruments and markets. Through the Newmark Grubb Knight Frank brand, the Company offers a wide range of commercial real estate services including leasing and corporate advisory, investment sales and financial services, consulting, project and development management, and property and facilities management. BGC’s customers include many of the world’s largest banks, broker-dealers, investment banks, trading firms, hedge funds, governments, corporations, property owners, real estate developers, and investment firms. For more information, please visit www.bgcpartners.com. BGC, BGC Trader, Grubb & Ellis, Grubb and Newmark are trademarks and service marks of BGC Partners, Inc. and its affiliates. Knight Frank is a service mark of Knight Frank Limited Corp., used with permission
Company OverviewGlobal Healthcare Services
5
Healthcare OverviewGlobal Healthcare Services
The changing healthcare landscape will continue to have a substantial impact on all providers and healthcare real estate in 2014. Declining reimbursements and operating margins, combined with a heavy regulatory environment, are putting pressure on hospitals and health systems to adapt.
Standard & Poor’s Ratings Services recently revised its outlook for the healthcare sector to ‘negative’ and expects credit rating downgrades to continue to exceed upgrades in 2014. The rating actions in the second half of 2013 were increasingly negative and outpaced upgrades compared to the first half of the year when upgrades exceeded downgrades. In addition, negative outlook changes increased by 20% in 2013, which suggests that additional downgrades will occur in 2014 and 2015.
2013 U.S. Not-For-Profit Healthcare Rating Trends
Significant M&A activity was the source of many rating changes in 2013 and is expected to continue in 2014. In the first half of 2013, there were 37 hospital mergers and acquisitions with an aggregate value of approximately $6.0 billion with several mega-mergers, including Community Health Systems and Health Management Associates, Tenet and Vanguard, Trinity Health and Catholic Health East. Although a limited number of mega-mergers are expected
in 2014, deal volume in the sector is expected to increase as small standalone not-for-profit hospitals align with larger and strategic healthcare organizations as a result of compressed revenues and increased competition.
2013 U.S. Hospital Transactions ($ Amounts in Millions)
Demographic trends within the healthcare industry indicate substantial growth for the next decade. Healthcare accounts for approximately 17.6% of the overall GDP for the U.S. and is expected to increase to 19.9% by 2022. In large part, this is due to demographic shifts, an aging population and the emphasis on relocating more outpatient care to a lower cost setting. Individuals over 65 years of age have three times as many office visits per year as people under 45, and the oldest of the 78 million baby boomers will reach 65 in 2012, the youngest in 2029. Furthermore, 32 million uninsured Americans will be covered by health insurance under “healthcare reform.”
*Source: S&P
0
2
4
6
8
10
12
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Upgrades
Downgrades
0
20
40
60
80
100
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
2008 2009 2010 2011 2012 6 Mo.2013
*Source: Levine Associates
$ Volume of Hospital Transactions
# of Hospital Transactions
6
Healthcare OverviewGlobal Healthcare Services
Aging Population Trends
Investment Demand
The medical office investment class has emerged from the recession as one of the most dominant and risk adverse investments in the commercial real estate industry, and investment demand for stabilized medical office buildings will continue to accelerate in 2014.
In 2013, the average capitalization rate for all medical office buildings located in the U.S. was 7.40%, which is a 33-basis point decline from 2012 (RCA). The majority of both the healthcare investors and brokers that participated in the survey perceive capitalization rates for off-campus, multi-tenant medical office buildings that are not affiliated with a hospital will trade at a capitalization rate range from 6.5% to 7.0%.
With the Federal Reserve committed to keeping interest rates down through 2014, to enhance economic growth, and with significant medical office investment demand, we expect capitalization rates to continue to decline for both on-campus and off-campus stabilized medical office buildings. More than 55% of the healthcare investors that participated in the survey see values for both on-campus and off-campus medical office buildings that are hospital-sponsored increasing over the next 12 months.
U.S. Cumulative Monthly Volume ($ Amounts in Millions)
There was over $7.17 billion in medical office transactions in 2013, a 7.6% increase compared to 2012, and there remains significant opportunity (RCA). The Healthcare REITs raised $9.28 billion in 2013 primarily in senior debt and common equity. Health Care REIT Inc. raised the largest amount of common equity with a $1.69 billion offering completed in May (CoStar). There is an inventory base of more than $1.0 trillion in healthcare-related real estate in the U.S. and only 8% to 9% is institutionally owned with healthcare providers owning the majority. With declining operating margins, significant capital requirements and fears of potential credit rating downgrades, we anticipate that struggling healthcare providers will begin to monetize their non-core healthcare assets to raise capital while improving their balance sheets.
Sources
http://www.beckershospitalreview.comhttp://aharesourcecenter.wordpress.comhttp://www.levinassociates.comhttp://www.aoa.gov
*Source: Administration on Aging
Healthcare Overview
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
90,000,000
100,000,000
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
ProjectionsAge 65 +Age 85 +
*Source: RCA
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
J F M A M J J A S O N D
201320122011
7
Survey ResultsGlobal Healthcare Services
REIT, Developer, Advisor/Broker
Real Estate Advisor / BrokerInvestor
Where do you see values for premier on-campus medical office buildings heading during the next 12 months?
During the next 12 months, which asset types will you consider for acquisitions?
On-CampusMOBs
Off-Campus Hospital-Affiliated MOBs
Off-Campus Non-Hospital
Affiliated MOBs
Specialized Assets
Skilled Nursing Facilities
% of Respondents
Senior Housing
1 Client Logo
US Regions
Pacific Northwest
7%
West
19%
Southwest
16%
Southeast
16%
Northeast
6.5%
Midwest
22%Which regions are preferred for new acquisitions or development?
8
Survey ResultsGlobal Healthcare Services
What is the average hold time frame for your clients’ medical office investments?
REIT, Developer, Advisor/Broker
53%Under 3 years3-7 yearsOver 7 years
47%11%
Going-in Cap RatePurchase Price/SF
Cash-on-Cash ReturnIRROther
Which type of measurement do your acquisition clients utilize most?
57%14%
11%6%
For new development and future acquisitions, is there a preference to align with a for-profit or not-for-profit healthcare system or hospital?
For-profitNot-for-profit
32%
68%
What is the minimum initial development yield that your typical client would consider for a medical office development meeting their highest standards?
% of Respondents
9
Survey ResultsGlobal Healthcare Services
REIT, Developer, Advisor/Broker
Where do you perceive capitalization rates for the following on-campus medical office building scenarios?
5.0 - 5.5% 5.5 - 6.0% 6.0 - 6.5% 6.5 - 7.0% 7.0 - 7.5% 7.5 - 8.0% 8.0 - 8.5% 8.5 - 9.0% 9.0 - 9.5% 9.5 - 10.0%
PRIMARY Market, SINGLE Tenant, Health System:
8% 12% 31% 25% 17% 5% 2% 2% 0% 0%
SECONDARY Market,SINGLE Tenant, Health System:
0% 5% 9% 31% 28% 16% 11% 0% 0% 0%
PRIMARY Market, MULTI Tenant Physician: 3% 3% 12% 32% 29% 14% 6% 0% 0% 0%
SECONDARY Market, MULTI Tenant Physician: 0% 0% 3% 13% 30% 31% 16% 8% 0% 0%
If a hospital or healthcare system were to sell any of its real estate assets, what do you predict to be the top 3 reasons?
Where do you anticipate healthcare system development activity to be during the next 12 months compared to a year ago?
50%
7%
43%
HigherSameLower
Low
cap
italiz
atio
n ra
tes
Impr
ove
its
bala
nce
shee
t
Pro
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m
arke
t sha
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Mod
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ies
/ up
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uipm
ent
New
real
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ate
deve
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ent
Red
uce
faci
lity
man
agem
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nd
mai
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ance
resp
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bilit
ies
Exc
ess
real
est
ate
as
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mer
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ition
Oth
er
% of Total
10
Survey ResultsGlobal Healthcare Services
What types of financing sources are your clients utilizing?
REIT, Developer, Advisor/Broker
All Cash from Funds on Balance Sheet
Bank DebtBond Financing
Credit Tenant Lease FinancingInsurance CompaniesLine of CreditOther, please specify
26%
28%5%
8%
15%
17%1%
Where would you project the annual rental growth rate to be for medical office buildings during the next 12 months?
Real Estate Advisor / BrokerInvestor
For new development, what is the minimum pre-leasing threshold for an off-campus medical office building?
13%24%
23%40%
More than 80%70%-80%60%-7050%-60Less than 50%
What is the minimum lease term that you would consider for an on/off-campus sale-leaseback by a health system?
25%
15%2%
58%
More than 20 years
15 - 20 years10 - 15 years5 - 10 years
11
Survey ResultsGlobal Healthcare Services
In the future, when you look back on 2013 to assess the healthcare real estate investment market, how do you think you will rank the factors below from the highest impact (1) to the lowest impact (7)? Please pick each number once to rank the factors from highest to lowest.
(1) HIGHEST IMPACT 2 3 4 5 6 (7) LOWEST
IMPACT
Healthcare systems focused elsewhere 29% 35% 15% 6% 12% 3% 0%
Lack of available product to buy 15% 15% 21% 26% 12% 9% 3%
Increased buyer competition 24% 32% 21% 15% 6% 3% 0%
Healthcare system M&A 6% 24% 24% 21% 9% 12% 6%
Development of hospital and healthcare system MOBs 9% 21% 12% 18% 24% 15% 3%
Compressing development yields 6% 18% 18% 21% 15% 24% 0%
Other 3% 0% 3% 0% 3% 3% 18%
Which types of medical office buildings are preferred by your clients? Please rank in order of preference with (1) being the highest.
(1) HIGHEST IMPACT 2 3 4 5 (6) LOWEST
IMPACT
On-Campus Single-Tenant MOBs 41% 19% 22% 3% 5% 5%
On-Campus Multi-Tenant MOBs 43% 30% 11% 5% 3% 5%
Off-Campus Multi-Tenant MOBs - Hospital Affiliated 22% 32% 24% 11% 0% 5%
Off-Campus Multi-Tenant MOBs - Non Affiliated 8% 14% 19% 16% 35% 5%
Off Campus Single-Tenant MOBs - Hospital Affiliated 8% 24% 22% 30% 5% 5%
Off Campus Single-Tenant MOBs - Non Affiliated 11% 8% 8% 19% 14% 41%
(1) HIGHEST IMPACT 2 3 (LOWEST IMPACT)
On-Campus Medical Office Buildings 30% 24% 15%
Off-Campus Hospital-Affiliated Medical Office Buildings 36% 30% 9%
Off-Campus Non-Hospital Affiliated Medical Office Buildings 15% 21% 27%
Specialized Assets 12% 6% 9%
General Acute Care Hospitals 0% 0% 12%
Senior Housing 21% 3% 18%
Skilled Nursing Facilities 12% 3% 6%
During the next 12 months, select your top 3 asset types that you are targeting for acquisitions. Please rank in order of preference with (1) being the highest only choosing the top 3.
REIT, Developer, Advisor/Broker
12
Survey ResultsGlobal Healthcare Services
Health Systems & Hospital Administrator
PRIORITY
Cost reduction 14
Quality / patient safety 13
Increase market share / ability to compete successfully in market 12
Improve patient experience / patient satisfaction 11
Reimbursement 10
Developing an accountable care organization 8
Technology system / equipment 7
Care coordination 7
Physician recruitment and retention 7
Construction / capital improvements 6
Physician staff ventures / realignment 6
Revenue cycle 6
Mergers & Acquisitions 5
New clinical products / services 5
Leadership development 4
Physician employment 4
Nurse / staff recruitment and retention 3
Improve supply chain dynamics 3
How would you rank your organization’s top priorities for the next 3 years?
13
Survey ResultsGlobal Healthcare Services
Health Systems & Hospital Administrator
Are you willing to acquire the real estate?
YesNo67%
33%
Generally speaking, is your hospital seeking to own more medical office buildings or less?
YesNo
58%42%
What part of real estate development is needed as part of your growth strategy?
% of Respondents
Med
ical
offi
ce
build
ings
Urg
ent c
are
/ fre
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ical
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Oth
er
If your organization is acquiring group practices, rank your organization’s priorities for types of service providers for the next 3 years.
0123456789
10
Gen
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Wom
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Car
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Ped
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Sur
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Onc
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Inte
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Med
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e
Car
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Der
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Orth
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Pai
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Oth
er
Low Priority Neutral High Priority
14
Survey ResultsGlobal Healthcare Services
If the hospital were to sell any of its medical office buildings, what would be the driving reason?
% of Respondents
For real estate development needs, what is the estimated increase in square footage that is needed?
Less than 25,000 SF
25,000 SF - 50,000 SF
50,001 SF – 75,000 SF
75,001 SF – 150,000 SFMore than 150,000 SF
36%
7%
29%
21%
7%
If yes, where in the monetization process is your organization?
Actively pursuing
A potential option
Already occurred
Not interested
Other
Health Systems & Hospital Administrator
Low
cap
rate
s
Impr
ove
its
bala
nce
shee
t
Pro
tect
mar
ket
shar
e
Mod
erni
ze fa
cilit
ies
/ up
grad
e eq
uipm
ent
New
real
est
ate
deve
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ent
Red
uce
faci
lity
man
agem
ent
and
mai
nten
ance
re
spon
sibi
litie
s
Exc
ess
real
est
ate
as
a re
sult
of a
mer
ger o
r ac
quis
ition
Oth
er
What is the overall occupancy level for your on and off-campus medical office building portfolio?
Physician recruitment Renovating existing facilities and development new MOBsAcquiring systems or other hospitalsPartnering with other systems and hospitalsMaintain current level of market share
40%
7%
33%
7% 13%
15%
46%8%
31%
15
NotesGlobal Healthcare Services
www.ngkfglobalhealthcare.com
Garth Hogan Executive Managing Director Global Healthcare Services 949.608.2115 ghogan@ngkf.com Todd Perman, CCIM Executive Managing Director Global Healthcare Services 404.806.2510 tperman@ngkf.com
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