Q4 2023 State of the Healthcare Real Estate Market

February 12, 2024

The SkyView Advisors Healthcare Real Estate team is pleased to present our State of the HRE Market newsletter for the year ending 2023. With the year now completed, we look at the state of the healthcare real estate market year to date and look forward to what we can anticipate for 2024.

Healthcare Real Estate Market Fundamentals

As an alternative commercial real estate asset class, healthcare real estate continues to exhibit very strong fundamentals and outshine the core sector assets, notably professional office and retail. Both occupancy expansion and rental rate growth continue a solid upward years long trend. The national occupancy rate in Q4 2023 was 92.8% continuing the rise which commenced in Q1 2021 and up 160 basis points since 2021.

MOB Occupancy Climbing Across Top 50 Metro Areas

Source and Copyright: Revista. Data believed to be accurate but not guaranteed and is subject to future revision. 

Rent Trends

Rental rates also continue their growth trend, which has prevailed since 2019 began and accelerated starting in 2020. In the top 50 metros, NNN rates have increased over 10% since mid-2020. 

Source and Copyright: Revista. Data believed to be accurate but not guaranteed and is subject to future revision. 

Construction Activity

Construction activity continues to be soft with both starts falling slightly in Q4 and completions holding steady at a historically low volume. This low level of construction activity continues to bolster occupancy and rental rate fundamentals in the sector.

Preliminary Data is Showing Another Slow Quarter

Source and Copyright: Revista. Data believed to be accurate but not guaranteed and is subject to future revision. 

These strong industry fundamentals have played a significant role in supporting the value of MOB assets in the current macroeconomic environment. Medical office building fundamentals have proven to be less volatile than other CRE asset classes, notably professional office in the post pandemic era, offering investors a more secure and reliable investment option in an uncertain market. MOBs are having their time in the sun as a very resilient alternative real estate asset.

Transaction Volume

Nationally, year-over-year, the dollar value of transactions for healthcare properties is down, however the number of transactions taking place has only mildly declined. This is generally a reaction to the higher interest rate environment and the more restrictive debt market that we are experiencing, and we are seeing a lack of large portfolio transactions with more velocity in the single asset space. The large portfolio transactions have tailed off also due to the inability to finance at scale. Preliminary estimates of the Q4 2023 volume come in at $1.4B. This estimate is usually revised upward as the data is finalized and we anticipate a final tally in the $1.6B range. This indicates volumes are still depressed but holding steady with Q3 having totaled $1.4B in transactions. 


A look at 2023 annual transactions in a historical context conveys the lack of volume. Total volume for 2023 came in at $7.6B vs. 2022 volume of $25B. For comparative purposes, it needs to be noted that 2022 exhibited historically unprecedented levels of transaction volume across the board and the volume is substantially skewed by the merger of HTA and HR, an $11B transaction in Q3 2022. When we compare 12-month transaction volume to the more normalized years from 2016 to 2020 we see those years delivering volume ranges of $10.3B to $15.7B which exhibits a much less retraction of transactions.


It is noteworthy that the dollar volume decline does not tell the complete story about the health of the sector and demand for HRE properties. The first half of 2023 saw 362 transactions completed versus 426 in the first half of 2022, a decline of only 15% so the market is still robust. Similar data is anticipated for the second half of 2023. The decline in dollar volume in contrast with transaction volume indicates the market is still very active but we are not seeing large portfolio sales. Anecdotally, we are seeing signs of transaction velocity improving with improving macroeconomic conditions. Although yet to decline, the stabilization of interest rates appears to be having a positive effect. We do not anticipate a major upward trend in transactions but anticipate an incremental increase into the new year.

Source and Copyright: Revista. Data believed to be accurate but not guaranteed and is subject to future revision. 

Financing Slowdown

As would be expected, financing transaction velocity is in lock step with sales volumes. Q4 2023 mirrors Q3 2023 with $3.5B in mortgage originations. 


While there are plenty of lenders willing to provide financing, primarily for high quality assets, across the sector there has been substantial debt pricing increases and tightening of risk tolerance. As goes with transaction volume, the financing levels have declined. While the increase in debt costs have fortunately not directly correlated to cap rate expansion, the decline in available financing for deals with shorter WALTS and weaker tenant credit is substantial. Adding to the debt issue is the uncertainty of pricing. With less transaction volume the cost of debt is hard to predict thus making underwriting more challenging for investors.

Source and Copyright: Revista. Data believed to be accurate but not guaranteed and is subject to future revision. 

Asset Pricing

While demand in the sector remains strong among a wide range of investors relative to other commercial real estate sectors, 2023 has seen some expansion of cap rates. While there is ample equity capital available in the space, many would-be investors are currently hindered from making purchases due to the cost of debt, which has been fueled by interest rate hikes instigated by the U.S. Federal Reserve Bank and a subsequent pullback by many lenders. In addition, current market conditions have led to a disconnect on pricing between sellers and buyers – the so-called “bid-ask gap.”


While interest rates made a huge upward move in 2023, it is notable that the rise in cap rates in the HRE sector, of 80 basis points, is minimal when viewed in terms of the rise of the cost of capital. Also of note is that cap rates rose just 10 basis points from Q3 to Q4 2023 suggesting the rise is slowing. Such a delta between the rise of interest rates vs. cap rates speaks to opportunity in HRE. Investors are clearly taking note of this and the strong fundamentals in the space and we saw over $2.5B of equity capital enter the sector in 2023, 50% of which is from “new” investors. This infusion of new capital is primarily from the reallocation of “dry powder” from other CRE sectors, mainly professional office and retail.


With the Federal Reserve pausing on interest rates in September and signaling the potential for easing in 2023 we anticipate cap rates to stabilize through the end of 2023 resulting in a normalization of pricing and leading to greater transaction volume.

Source and Copyright: Revista. Data believed to be accurate but not guaranteed and is subject to future revision. 

Looking at 2024

The macroeconomic population aging trend and the expansion of the healthcare industry will continue to fuel expansion of the industry through 2024 and well beyond. Despite lower transaction volume in 2023, overall pricing for HRE assets continues to be relatively steady and we expect this to continue in the coming year.

The positive fundamentals of the healthcare industry and the HRE sector are the keys to an early return to the transaction volumes and asset pricing of the last few years. The overwhelming demographic shift towards more healthcare utilization and expenditure continues to drive the expansion of the healthcare industry.  Coupled with the shift to outpatient facilities, a prime example of which is the growth of ambulatory surgery centers, the need for quality HRE space will continue to expand at an aggressive rate.


As noted, the fundamentals of HRE remain very strong with both occupancy and rental rates maintaining growth rates besting competing real estate asset classes, especially professional office. Substantial rent growth and steady occupancy and absorption rates continue to generate investor interest and support valuations. The HRE sector has proven to be less volatile than other asset classes, offering investors a more secure and reliable option in a difficult macroeconomic market. This flight to the resiliency of HRE has resulted in ample capital to fuel a positive transition back to higher asset values with the cost of debt being the primary point of friction. These positive indicators demonstrate opportunities for investors in the HRE sector and has resulted in the significant movement of equity capital into the space.


One potential headwind for the expansion of the sector is the labor component. While the expansion of healthcare services continues, staffing of new facilities has become a challenge.


In terms of trending locations and asset types, we continue to see the flight to quality assets and major metropolitan markets. Paradoxically, we are also seeing the growth of interest and activity in tertiary market rental rates, occupancy and transaction volumes. The strong fundamentals of these markets and the scarcity of opportunities are driving the available capital to seek alternatives.  


Clearly, opportunities also lie in the identification of distressed assets due to loan maturity issues. We will see more activity from investors looking to acquire assets at a discount to the historically high pricing of recent years. Well capitalized buyers with strong lending relationships will continue to have access to advantageously priced debt capital and execute on the advantage.


It is important to note that any discussion of when the market will return to “normal” must be in the context of the historical high transaction volume and pricing of the last couple of years. Transaction volume in 2022 was at unprecedented levels, even when the $11B HTA-HR merger is removed. 


Undoubtedly a more stable and normalized interest rate environment will be key.  As of the end of 2023, the Federal Reserve has paused rate increases but stands ready to resume should inflation not show signs of retreating. The consensus appears to be that we will see stability into 2024 followed by minor easing. The stability itself should contribute well to a more active market with greater availability of debt and higher pricing and we are seeing investors anticipate this unfolding and become more active in sourcing deals.

Source and Copyright: Revista. Data believed to be accurate but not guaranteed and is subject to future revision. 

We expect that 2024 will continue to see the rise in mental healthcare clinics. Capital is moving into this cohort due to the strong increase in demand. 


In today’s market it is imperative that owners contemplating a sale or simply seeking to understand the complex HRE landscape have an advantage. SkyView Advisors has the experience and expertise to provide that advantage. Our objective is to provide uncompromising personal service to every client, every time. Our goal is total reliability and producing the optimal results in every transaction.


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Charts via Revista.

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