Recession resistant industries and companies provide the goods and services consumers demand, regardless of the state of the economy. Experts often tout the medical office industry as recession resistant, but consumer demand is only part of that equation. Over multiple real estate cycles, the outpatient medical real estate asset class (especially medical office buildings, “MOBs”, and ambulatory surgery centers, “ASCs”) have proven their ability to combat fluctuations in the economy. The sustained strength of these properties makes them an attractive, lower risk alternative for those looking to grow or diversify their real estate holdings, particularly when one considers the typically high-cash yields healthcare real estate generates as compared to other real estate sectors with similar risk profiles. Here we will explore in detail the variety of factors contributing to the resiliency of the outpatient healthcare real estate industry.
DEMAND FOR SERVICES
Demand for health care is inelastic, regardless of economic conditions or financial wellbeing, people must maintain their health in order to survive. While many services may be postponed during an economic downturn, medical treatment remains essential. Additionally, more U.S. consumers have health insurance coverage than ever before. Approximately 92% of the population has some form of healthcare insurance, making medical services more attainable. Being insured helps mitigate the need to postpone a medical service due to costs. The U.S. healthcare system supports an insured population of more than 300 million people and represents more than 18% of U.S. gross domestic product (GDP) . Projections suggest that, by 2028, healthcare will consume 20% of GDP, outpacing overall economic growth.
SHIFTING DEMOGRAPHICS
In the U.S., a Baby Boomer turns 65 every 8 seconds, or nearly 11,000 each day. Those aged 65 and over represented 17% of the U.S. population in 2020 but will exceed 20% by 2030 and 24% by 2060 as the U.S. is estimated to exceed 400 million people. By 2060, those over 65 will nearly double from 50 million to 95 million. Those over 85 will triple from 6.5 million to 19 million. As the Boomers continue to age, their need for care will grow exponentially – as a general benchmark, those over 65 will spend about five times more on healthcare each year than their younger counterparts.
During the period from 2020 to 2040, the Southeastern United States population is projected to grow at a rate nearly 25% faster than the U.S., as a whole (17.5% vs. 14.1%). And over that same 20-year period in the Southeast, the senior population over age 65 is anticipated to increase by over 37%.
DEMAND FOR SPACE
As patients return to in-person visits following the pandemic, medical offices across the United States are experiencing high occupancy, leading to a lack of available inventory. As of February 2023, there were more than 36,500 outpatient MOBs in the U.S. (7,500 square feet and up) comprising more than 1.6 billion square feet of space valued at over $509 billion in market value.
Further, the demand for medical office space is outpacing supply in most regions as MOB occupancy continues to climb amid record low completions.
A steady decline in telehealth utilization adds to the demand for available medical office space. In the second quarter of 2020, virtual visits accounted for 52% of all outpatient visits in the U.S., per the Chartis Group, but they’ve been steadily decreasing since then. Telehealth visits have since stabilized at around 8%, according to Advisory Board. Despite the overall decline in telehealth use, research indicates a high likelihood that it will not diminish entirely and that the healthcare industry supports this type of care.
SITE OF CARE DELIVERY
Another significant factor contributing to the strength of the outpatient healthcare real estate industry is an ongoing transition to decentralized consumer access to care due to the convergence of regulatory and market forces. Advisory Board projects outpatient volume to increase 18.7% overall and ambulatory surgery volume to increase by 14% by 2032. Moreover, the outpatient shift is accelerating for key revenue-driving service lines. As a result, ASCs — not hospitals — will be the primary beneficiaries of growth in revenue-driving service lines.
Supporting these projections, Gensler, the global architecture, design, and planning firm, states, “The increasing capabilities and operational simplicity of clinical technologies allow formerly complex procedures, such as hip replacements, to be delivered in outpatient healthcare settings.” They continued, “The resulting healthcare real estate trend will be to migrate clinical services, to the greatest extent possible, from hospitals to primary- and secondary-service areas in local communities.” Overall, outpatient and ambulatory surgery care is more affordable for the patient, cost effective for the provider, convenient for both parties, and fosters great quality of care.
LONG-TERM TENANCY AND STABLE CASH FLOW
Healthcare real estate is a strong investment due to its stability. This is due, in large part, to the nature of MOB tenancy. Healthcare providers are substantially invested in their locations, both from a facility perspective (specialized facility design, layout, equipment, etc.) and also from a market share position. Once established in a community, healthcare providers are unlikely to relocate and risk jeopardizing their local patient market share. These considerations lead to healthcare tenants signing longer term leases than other office tenants. The lease term in medical offices typically ranges from 7-15 years with an average of 12.5 years, compared to an average of 4.3 years for general offices in the U.S.
Medical office renewal rates are typically 80% or more and rent growth is very steady, ranging between 2-3% per year. These dynamics also translate into a long-term stable occupancy trend. Even in the wake of the financial crisis of 2008–2009, healthcare real estate occupancy never fell below 90 percent. Following the pandemic-related shutdowns in 2020, physician employment recovered quickly and, despite the sudden halt of many services for a period, renewal rates increased. Additionally, most medical offices have a triple net rent model so that tenants are responsible for real estate taxes, insurance and maintenance, providing cost stability for owners. These elements combine to create a stable cash flow environment from outpatient healthcare real estate assets.
CONCLUSION
While there is no single determinant leading to the resiliency of outpatient healthcare real estate during economic downturns, the cumulative influence of multiple industry fundamentals result in a truly recession resistant commercial real estate investment. No investment is impervious to challenges during difficult financial times, however, medical offices have proven their strength and stability across markets and economic cycles.
The specifics of any real estate investment property will affect how recession resilient it will be. Flagship Healthcare Properties employs a highly specialized team of experts and proven models applied to every medical office investment. As a general asset class, outpatient healthcare real estate offers a better risk-reward profile in times of volatility than other real estate investment offerings.
