‘The Money Faucet Is Turned Back On’: The Fed’s Rate Cuts May Mean More Capital For Medical Real Estate

As specialists examining the medical office market might say, a rate cut a day keeps the doctor away. 

More accurately, the Federal Reserve’s decision to begin a cutting cycle at last week’s Federal Open Market Committee meeting stands to boost the financial health of the Midwestern medical sector, which already enjoys stronger fundamentals than other markets, panelists said at Bisnow’s Chicago Healthcare Summit on Tuesday.

Some who spoke at the event at Swissotel Chicago said the cuts will lead to a flurry of transactions and inject new vigor into an already healthy medical market. 

“The money faucet is turned back on,” said Jon Boyajian, a principal at Echo Real Estate Capital. “We're all going to do more deals.

“I was in the room next door,” Boyajian added, referring to Bisnow’s networking area at the event. “The volume was turned up. I saw more smiles. I think we're all hopefully looking forward to more transaction volume next year versus the last two years.” 

High interest rates and inflation had stifled medical office investment activity at the national level as of earlier this year, according to CBRE. In the first quarter, investment in medical office space fell by 21% quarter-over-quarter to $1.6B and was down 7% year-over-year, according to GlobeSt. Overall medical investment volume fell by 48% compared to the period between 2019 and 2023.

Now, that could be turning around, though many of the Fed's expected cuts have already been baked into the equity and bond market. That means the relief toward the bottom line might not be as impactful as the level of comfort the cuts offer investors, HSG Medical partner Kage Brown said.

During the higher-rate period, rapid fluctuations in the 10-year Treasury yield, a benchmark often used to set interest rates on long-term loans, made it tough to close deals, he said.

Brown is hopeful these cuts bring stability to the yield curve. 

“From a practical standpoint, the signaling is there, and I think there's a lot of relief for those in real estate,” Brown said. “What we're looking for is really some stability and predictability. In the last 18 months, we've really had none of that.”

Other panelists had more tempered expectations.

“I don’t think the shift is overnight, but I think the sentiment moves from cautious to cautiously optimistic, which bodes well for an asset class like medical office, where the fundamentals over the last two years have been really positive,” said George Ross, director of transactions at Harrison Street.

Chicago ranked fourth among the top 25 medical office markets in the country, with almost 29M SF of medical offices across 427 buildings, according to a 2023 report. The city added 4.3M SF of medical office space between 2012 and 2021, growing almost 18%. 

Ross pointed to record-high occupancy figures and rent growth trending toward 3% or higher as signals of strong underlying performance. He said investors who have been on the sidelines during the higher-rate environment will notice those trends and consider medical office properties to diversify their portfolios, which will bode well for those with a strong presence in the asset class. 

But even if transaction volume does increase in the wake of rate cuts, Boyajian said he still expects to stay creative in building capital stacks, continuing to use nontraditional financing sources like local credit unions or debt funds. 

Boyajian, whose company has invested in healthcare markets across the country, said Chicago has an “incredibly competitive” healthcare market, with upward of 20 health systems in the metro area.

Because of that multitude of options and possible mergers, when Echo is looking to buy a building, it aims to ensure it can nab a tenant like an expanding primary care group or an imaging group to fill the space, he said. 

Some tenants hold back from signing a lease because they don't know who will own a nearby hospital in a few years, Boyajian said. This can hamstring those tenants' abilities to make strategic business decisions and identify long-term referral partners, he said. 

“While interest rates coming down is going to help everybody, we're not out of the woods yet,” he said.