What You Need To Know About Healthcare Financing In Q2

Healthcare remains a stable, albeit rapidly evolving, asset class in commercial real estate.

Within the past decade, hospitals have outsourced surgeries and patient care to smaller centers in local neighborhoods. Baby boomers have moved back to the cities, prompting the need for modernized care facilities. Medicare and Medicaid reimbursements have shifted toward a value-based model, changing how facility owners invest in and see a return on properties.

Meanwhile, healthcare insurance for Americans continues to be in flux as congressional leaders fail to agree on a reform plan. 

Despite ups and downs in the market, healthcare is still drawing in investors. By 2030, all baby boomers will be older than 65, and 21% of the U.S. population will be on Medicare, Social Security or both, making adequate healthcare resources a necessity. The sector’s continued success has led Hunt Mortgage Group to expand its senior housing and healthcare lending platform, which includes the addition of a dedicated unit focused on the industry. 

Senior Managing Director Kathryn Burton Gray is a part of that team and brings 30 years of experience to Hunt’s healthcare financing arm.

“This is an asset class that survives,” Burton Gray said. “There are always going to be deals. Even during the financial market disruption in 2008, this asset class has always been consistently performing.”

Senior living 

Assisted living occupancy was 85.7% in Q1, a record low, the National Investment Center for Seniors Housing & Care reported. Burton Gray points to overbuilding in the senior housing market as one reason for the slowdown. 

Insufficient nursing talent and outdated skilled nursing facilities have compounded occupancy concerns. Baby boomers are rejecting the isolated nursing homes of the past, opting for facilities that encourage socialization, wellness and mental stimulation.  

“You can’t keep building the same product you built 20 years ago,” Burton Gray said. “Many of these facilities are built for people in their 70s or 80s. The next big shift is the baby boomers.”

Developers have built age-restricted, experiential communities in response to baby boomers’ need for independence. In 2015, developers across the country started 37,000 age-restricted homes. Some projects, like The Clare in Chicago, have capitalized on baby boomers’ return to the cities and preference for apartment living, constructing age-restricted luxury high-rise offerings assisted living programs.

But options like The Clare are reserved mainly for wealthier retirees. Prices, which depend on the number of rooms and the view, can range from $300K to $1.5M. For the rest of the aging population, affordable senior housing will become a growing concern in coming years. 

“We haven’t really dealt with affordability, and it’s going to be a huge surprise to everybody, because right now if you think about it, what’s being built is for the one to two percentiles,” Burton Gray said.

Hospital consolidations 

Declining reimbursement rates and the rise of increased outpatient care has impacted the profitability of hospital systems. Annual median revenue growth rate dropped by 2.2% from 2016, a bigger dive than the one taken by the median expense growth rate of 1.7%. Nonprofit and public hospitals have especially felt market strain. Median operating cash flow dropped to 8.1% from 9.5% in 2016. 

Instead of larger campuses, urgent care centers provide similar services in more accessible areas like shopping centers or central business districts. 

“I think across all healthcare, there is going to be a rude awakening on seeing significant consolidations of different spaces,” Burton Gray said. “For hospitals, many of the procedures are being done in stand-alone centers. The hospital cost structure is too expensive. There is momentum in urgent care because there is a place for them. They are cost-effective.”

Deals are still happening in the acquisitions space. Hunt is currently working on three large transactions, one over $300M and another around $100M. While there are fewer large portfolio deals happening, Burton Gray said, single and double transactions remain common. Rising interest rates have also incentivized borrowers to seek out permanent financing through agencies like Fannie Mae and Freddie Mac to lock in long-term rates. 

This feature was produced in collaboration between Bisnow Branded Content and Hunt Mortgage Group. Bisnow news staff was not involved in the production of this content.