Discussing the possibilities and future of the intersection of healthcare and commercial real estate
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Today’s episode of the Providers, Properties and Performance podcast is my interview on the Women Investing Network podcast with host Sharon Lechter. We discuss the healthcare real estate industry asset class and its value to investors and physicians.
[2:25] How I got started and specialized in healthcare real estate
My mother and aunts had a residential real estate firm for several years. I knew that I did not want to go into residential real estate, and I was also getting my MBA. I thought I would go into commercial real estate, and I was hired by a developer in town that specialized in developing, owning, managing, and leasing medical office buildings. I really enjoyed helping physicians with their spaces. They were busy and they needed information quickly, and I had the opportunity to support these physicians so they could deliver healthcare. I thought it was pretty cool.
I also got into healthcare real estate during the .com phase, so I sort of saw on the horizon what we’re seeing right now in the market. I knew it would take a while, but I saw computers and the Internet becoming more prominent. There will always be a need for office space, but I don’t know that most people will have to be in an office space five days a week. So with that in mind, I didn’t necessarily want to go into office real estate, but medical offices are different. They are mission-critical and demand-driven. You have to go into an office for a physical examination. Doctors’ work has to happen in a facility or a surgery center, so it is sustainable. There is a reason for the development of medical offices, and you’re helping people at the end of the day.
[4:43] The current healthcare real estate market
Before COVID, hospitals really just wanted to do acute care services – and that is what they are designed and built for. That is what their revenue model is for. So anything that isn’t acute care, it’s better for the hospital and the physicians to have it outside the hospital. That might look like outpatient centers, surgery centers, diagnostic centers, or medical office buildings. They were all coming outside of the hospital.
With healthcare reform, a lot of hospitals and healthcare companies wanted to put primary care (such as community medicine, internal medicine, family medicine, and pediatricians) where people live instead of having them drive long distances. If you just need to get checked, you don’t want to make a long drive. Urgent care started becoming popular as well, as triage primary care services where people can be seen quickly.
Hospitals and healthcare companies have different strategies where they are buying an existing family practice, employing the physicians, and having people come to them for primary care. Then, when the patients need acute care, they go to the associated hospital. During the COVID-19 pandemic, hospitals were overrun with patients. If there was a system in place to triage some of the less severe cases and treat them outside of the hospital while the most severe cases were treated in the hospital, it could have eased the burden on hospitals and their workers. That model was starting to happen before the pandemic, and COVID just made it explode. Hospitals are now working even harder to get everything that isn’t acute care out of the hospital and strategically placing them in different locations in order to treat patients.
[8:29] Advice for people who want to get into real estate investment
First of all, you could just start investing in real estate investment trusts (REITs) that specialize in healthcare. You can buy shares on publicly traded REITs, if you want to invest on a small scale or use that as a starter investment strategy. There are probably $1 million and below, then $5 million and below. There are also a lot of 1031 investors that have other pieces of real estate but want to get out of one piece and into another.
There are some smaller assets such as office condos, and sometimes those can go for around $1 million. Those can be attractive to smaller investors, and the next level up is around $5 million. That is usually a private real estate company with one owner, but sometimes it is a partnership as well. They tend to raise some funds and leverage debt as well.
Then there is a bigger level of $5-15 million, and those are real estate investor companies that actively raise capital from different sources. Sometimes they do joint ventures. Above $15 million, you start getting into the institutional and they just have different types of capital and focus on larger acquisitions. It depends on how much you’re looking to invest and how much risk you want – and if you want partnerships to share the risk or if you want to go it alone.
As far as lenders, there is a lot of capital out there that would joint venture with somebody who is looking to invest. It’s an attractive asset class, and a lot of people are chasing the good deals right now. There are a lot of good things going on with medical office real estate, related to COVID, aging baby boomers, and other demographics.
In 2008-2009, medical office development really contracted to where it became needs-based. So, for a while medical office availability was limited. Cigna would sometimes go into new markets and there would just not be a lot of development. There might be a grocery store, houses, a strip mall, and a couple other small places, but no medical office building. They would go in and buy the land and build their own buildings. The demand is high and the supply is usually medium to low, which is good for sellers. For buyers, though, you really do need to partner with somebody who knows what they’re doing. You have to react pretty fast, and you have to know what you are buying.
[12:40] The future of Doc Properties
I help on the investment side of things, so if you are an investor looking to get into this asset class I look for properties based on your requirements. I have connections to potential joint ventures, and I help a lot of physician owners. There is a lot of capital out there that would joint venture with a practice that is looking to expand, and then they don’t have to use all of their own operating capital to build and develop their real estate. There are people who will do that and give them ownership just for signing the lease on the property. So, there are a lot of different ways that you can be successful and own a piece of real estate.
Depending on how you want to own and operate it and how much time you want to spend doing that, there are all kinds of partners to take tasks off your plate. There are industry specialists such as architects, general contractors, property managers, asset managers, and anything else that are specifically focused on this asset class that can add a lot of value.
[14:18] The importance of working with real estate experts when investing
There are people who want to sell their healthcare real estate but don’t necessarily want to have everybody know about it. A lot of those transactions happen before they go to market. A lot happens behind the scenes, and it’s nice to have experts on your side who can work with your requirements, needs, and wants.
Links to resources:
Women Investing Network Podcast
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Schedule a healthcare real estate investment strategy consultation: https://docproperties.com/free-consultation-trisha-talbot/