Vital Signs Fall 2021: Healthcare and Medical Office Report

VITAL SIGNS HEALTHCARE AND MEDICAL OFFICE REPORT FALL 2021

VITAL SIGNS

The Healthcare Sector: Recovering, Revitalized and Resilient

In March 2020, the U.S. Department of Health and Human Services (HHS) took the extraordinary measure of requiring that all elective procedures, nationwide, be suspended so that healthcare providers could more readily focus on and treat COVID-19 patients and their emergent health conditions. This directive remained in place for nearly eight weeks, resulting in significant declines in outpatient procedures and electives. All non-life-threatening procedures were essentially suspended and deferred during these two months. As a result of the decline in procedures, both healthcare employment and spending saw their largest drops in nearly 30 years, contributing significantly to the U.S. GDP collapse, which plunged from a 5% annual rate decline in Q1 2020 to an unprecedented 31.2% annual rate decline in Q2 2020. Healthcare spending fell at a 16.2% annual rate or by $97.6 billion in Q1 2020 and then an additional 54.1% or $383 billion in Q2 2020. By far the biggest decline in healthcare spending history, it represented 30% of the entire decline in consumer spending during the first half of 2020. Spending on outpatient care (everything from doctors and dentists to home healthcare and medical labs) fell at a -8.1% annual rate in the first quarter and -61% rate in the second quarter, mirroring not only the mandated shut down, but the challenges of resuming elective cases once the order was lifted.

CONSUMER SPENDING ON HEALTHCARE SERVICES

CONSUMER SPENDING HEALTHCARE SERVICES BY MAJOR CATEGORY

1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 Millions of 2012 Dollars

0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2

Outpatient Hospital & Nursing Home

Millions of 2012 Dollars

Source: U.S. Bureau of Economic Analysis

Source: U.S. Bureau of Economic Analysis

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CUMULATIVE PERCENT CHANGE IN VISITS BY SPECIALTY COMPARED TO BASELINE

Once the HHS order was lifted, procedures slowly returned and, by the end of 2020, had nearly recovered, reaching volumes just 6% below 2019 levels. PERCENT CHANGE IN VISITS FROM PRE-COVID BASELINE

Rheumatology Obstetrics/Gynecology Adult primary care Endocrinology Oncology Urology Behavioral health Surgery Orthopedics Allergy/Immunology Ophthalmology Podiatry Neurology Gastroenterology Cardiology Dermatology Physical medicine & rehab Otolaryngology Pulmonology Pediatrics

-70% -60% -50% -40% -30% -20% -10% 0% 10% 20%

2016-2019 Average 2020

1 5 9 13 17 21 25 29 33 37 41 45 49

Week Number

Source: Ateev Mehrotra et al., The Impact of COVID-19 on Outpatient Visits in 2020: Visits Remained Stable, Despite a Late Surge in Cases (Commonwealth Fund, Feb. 2021). https://doi.org/10.26099/bvhf-e411 Note: Baseline refers to the first week of March 2020. While the effects on overall outpatient visits abated significantly by the end of 2020, the cumulative effect across all specialties was a substantial decline in visits for the year. The effect was highly differentiated across specialties. Pediatric visits showed the greatest decline, while adult primary care showed only modest decline, along with other types of specialties, such as Obstetrics/ Gynecology and Rheumatology where patients may not have been able to defer care for prolonged periods of time. Healthcare spending fell at a 16.2% annual rate or by $97.6 billion in Q1 2020 and then an additional 54.1% or $383 billion in Q2 2020.

-30%-25%-20%-15%-10% -5% 0%

Source: Ateev Mehrotra et al., The Impact of COVID-19 on Outpatient Visits in 2020: Visits Remained Stable, Despite a Late Surge in Cases (Commonwealth Fund, Feb. 2021). https://doi.org/10.26099/bvhf-e411 Note: Data represent the cumulative difference in visits over weeks 10 to 52 compared to the baseline week (March 1–7). As the U.S. economy rebounded from Q3 2020 to Q2 2021, so did spending on healthcare and healthcare employment. By Q2 2021, total consumer spending had fully recovered to pre-pandemic levels, and healthcare was once again a major contributor to the recovery. As COVID-19 restrictions were lifted and patients returned to their healthcare providers, healthcare spending surged 21.5% between Q2 2020 and Q2 2021. Spending on healthcare services, which typically accounts for ~17% of total consumer spending, accounted for ~20% of the increase in U.S. consumer spending over that period. Not surprisingly, outpatient spending recovered more rapidly than spending on hospital and nursing home services.

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VITAL SIGNS

Employment trends have mirrored the spending data. Total healthcare employment fell by 1.6 million during the recession. Since April 2020, employment has increased by roughly 1.1 million, leaving a shortfall of 513,000 jobs. Employment recovery has been strongest in dentists’ offices, which have added 581,000 jobs since April 2020. Doctors’ offices have added 285,000 jobs and “Other Practitioners” (chiropractors, acupuncture, etc.) have added 218,000. One segment still losing jobs is nursing homes where employment has fallen by 245,000 jobs since April 2020. U.S. HEALTHCARE EMPLOYMENT TOTAL

10 11 12 13 14 15 16 17 Thousands of Persons

8 9

Source: U.S. Bureau of Labor Statistics

HEALTHCARE SECTOR JOB LOSS AND RECOVERY

-550 -350 -150 50 250 450 650

Apr 2020 - Aug 2021 Feb 2020 - Apr 2020 Net

Since April 2020, employment has increased by roughly 1.1 million, leaving a shortfall of 513,000 jobs.

Thousands of Persons

Source: U.S. Bureau of Labor Statistics

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HEALTHCARE REAL ESTATE REMAINING STEADY

Despite the many challenges that COVID-19 brought to bear on healthcare providers, including the temporary suspension of outpatient procedures, medical offices across geographies performed well as a real estate asset class. Occupancy held steady in most markets and demand for clinical medical office space recovered through the remainder of the year once outpatient procedures resumed and volumes recovered. Medical office rents also held steady or saw modest growth in most markets. Limited medical office supply coupled with steady demand helped to ensure strong rent performance. Class A medical office performed particularly well throughout the pandemic and has continued to see demand as healthcare prodedure volumes have returned. Most publicly traded healthcare REITS reported 2 to 3% effective rent growth in 2020. New medical office development has also remained brisk in the past year. 2020 saw an overall increase in construction starts versus 2019, and Q1 2021 saw an increase over 2020. 2020 completions also remained strong and tracked with prior years. Q1 2021 completions were down slightly from 2020. Given typical medical office development timelines of 2-3 years, recent completions were well underway when the pandemic hit. Construction costs have risen significantly since Q1 2020. We expect rising construction costs to begin to weigh on new construction starts. Speculative medical office construction remains challenging, anecdotally, with most new projects requiring at least 50% preleasing to move forward. Underwriting has also become more selective in respect to markets and submarkets. Markets with the most desirable patient demographics and payer mix are more advantaged compared to those with less desirable patient demand. MEDICAL OFFICE CONSTRUCTION T12M MOB CONSTRUCTION STARTS COST PER SQUARE FOOT MEDICAL OFFICE CONSTRUCTION MOB COMPLETIONS, STARTS AND IN-PROGRESS

15 20 25 30 35 40 45 50

500

450

400

350

Million Square Feet

Dollars per Square Foot

300

SF Started TTM SF Completed TTM SF in Progress

Source: Revista Med, Cushman & Wakefield Research

Source: Revista Med, Cushman & Wakefield Research

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VITAL SIGNS

STRONG APPETITE FOR MEDICAL OFFICE

Because of the resilience of medical office investments throughout 2020, investor appetite for medical office deals has remained strong, though transaction volume is lighter than 2020. Through August, 2021 transaction volumes have lagged both the 2020 (-11%) and 2017-2019 (-22%) average volumes. Since April, however, 2021 volumes have accelerated, outpacing 2020 by 51% and narrowing the gap with the pre-pandemic average. Single asset sales have been comparatively resilient, down just 11% year- to-date compared to the pre-pandemic average. Looking forward, we expect activity to increase through year-end above and beyond typical seasonality.

Because of the resilience of medical office investments throughout 2020, investor appetite for medical office deals has remained strong, though transaction volume is lighter than 2020.

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MEDICAL OFFICE TRANSACTION ACTIVITY

11.9

10.1

10.3

10.1

9.3 9.4

7.9

7.0

5.4 5.6

5.4

5.3

4.6

-39% vs. ’17-’19 Average YoY

3.8

3.5

2.7 2.8

2.4

Billions of Dollars

1.4

1.3

-11%

0.3 0.5 0.9

Single Asset

PortFolio Entity Level

Source: RCA, Cushman & Wakefield Research

MEDICAL OFFICE TRANSACTION ACTIVITY

1,000 1,500 2,000 2,500

0 500

Millions of Dollars

'17-'19 Average

2020

2021

Source: RCA, Cushman & Wakefield Research

MEDICAL OFFICE SINGLE ASSET SALES

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

Billions of Dollars

Billions of Dollars

'17-'19 Average 2020 2021

Qtr 1 Qtr 2 Qtr 3 Qtr 4

Source: RCA, Cushman & Wakefield Research

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VITAL SIGNS

As in 2020, private and REIT buyers have been more active than institutional buyers this year, with 50% of the deals going to private equity—although June and August 2021 did see an increase in institutional buyers. Several new-to-the-sector buyers have also emerged, entering through portfolio acquisitions or through partnership with a known operating entity. For example, Nuveen Real Estate’s recently acquired a 29-building national healthcare and life science portfolio from IRA Capital for $620M, giving its newly launched U.S. Cities Office Fund increased exposure to the healthcare sector. Investors have also begun to consider a broader range of healthcare uses and tenant types, including behavioral health tenancies, as they seek to place capital into the sector. MEDICAL OFFICE TRANSACTION ACTIVITY SHARE OF TOTAL (%)

50%

47%

43%

28%

28%

25%

21%

18%

15%

9%

7%

4%

3%

1%

1%

Private

Public

Institutional

User/Other

Foreign

'17-'19

2020

2021

Source: RCA, Cushman & Wakefield Research

MEDICAL OFFICE TRANSACTION ACTIVITY

2% 4% 1% 6% 2% 3% 7% 1%

0 100 200 300 400 500 600 700 800 900 Millions of Dollars

4%

8%

7%

19% 13%

25%

36%

41%

46%

37%

15%

51%

41%

7%

9%

5%

69% 63%

56%

53% 44%

39% 49%

36%

Private Public Institutional

User/Other

Private Public Institutional

User/Other

Source: RCA, Cushman & Wakefield Research

Cap rates have risen modestly from 6.2% in Q1 2020 to 6.4% in Q3 2021. The cost of fixed rate financing for medical office meanwhile has fallen significantly with the result that the spread between cap rates and cost of debt has widened from 206 basis points (bps) in Q1 2020 to a record 266 bps in Q3 2021.

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MEDICAL OFFICE ROLLING 4-QUARTER CAP RATES VS. COST OF DEBT

10%

8%

6.2% vs. 6.4% in March 2020

6%

4%

3.7% vs. 4.1%

2%

266 bps vs. 207 bps

0%

(2%)

Spread Cap Rate Cost of Debt

Source: RCA, Cushman & Wakefield Research (Includes refinancings)

SENIOR HOUSING SECTOR, CHALLENGED BUT IMPROVING

Senior housing as a sector—and consequently its unit absorption—struggled significantly as a result of COVID-19. In the early days of the pandemic, senior housing centers experienced high infection rates, as their patient populations were among the most susceptible to the virus. All types of senior housing—independent living, assisted living, skilled nursing, and CCRCs—have seen a decline in occupancy since the start of the pandemic, though occupancy levels across asset types are

improving with widespread resident vaccination. UNIT ABSORPTION BY PRODUCT TYPE

-60,000 -50,000 -40,000 -30,000 -20,000 -10,000 0 10,000

Independent Living

Assisted Living

Continuing Care/Life Plan

Nursing Care

Source: NIC MAP

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VITAL SIGNS

Unit absorption turned sharply negative in the senior housing space as a result of the pandemic. The impact was felt across property types, though it was most pronounced in the higher acuity formats, namely assisted living and nursing care. Indeed, nursing care-occupied units fell by 51,800 cumulatively in the four quarters ending Q1 2020, more than twice the number of the other three product types combined. Negative absorption held from the second quarter of 2020 through the first quarter of 2021. In the second quarter of 2021, net absorption turned positive once more for all product types except for CCRCs. These demand trends are reflected in the occupancy data. Nursing care was impacted the most as occupancy has fallen 11.8% cumulatively since Q1 2020. In contrast, however, the sector has also had comparatively the largest rebound QoQ in Q2 2021. Assisted living was the next worst impacted (-9.1%, cumulatively) followed by independent living (-8.3%) and CCRCs (-7.1%). Overall, CCRCs and independent living facilities boast the highest occupancies. Early in the pandemic, senior housing facilities saw significant and very public case growth and resident fatalities. The failure of many facilities to reduce spread among their denizens was attributed, in some cases, to public policy failures and in others, to facility level failures to enact appropriate contagion control procedures as quickly as the situation warranted. It is not surprising, therefore, to see that demand declined significantly as seniors who might otherwise have considered moving into senior housing delayed this transition while others returned to their families where they perceived themselves to be safer. Sadly, resident deaths are also part of the explanation for the particularly sharp falls in demand for assisted living and nursing care units. We do not, however, expect the pandemic to cast a pall over the sector moving forward. Senior housing centers were the initial focus on the U.S. vaccine drive, and high resident vaccination rates paired with overcoming operational safety challenges have contributed to a rapid rebound. Supported by the well-attested demographic forces driving growth in the sector, we expect demand and thence occupancy levels to rebound strongly. As noted, the second quarter data already points in this direction.

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SENIOR HOUSING OCCUPANCY RATE BY PRODUCT TYPE

94%

90%

86%

82%

78%

74%

70%

Independent Living Assisted Living Continuing Care/Life Plan Nursing Care

Source: NIC MAP

Construction activity in the sector has been brisk, with independent and assisted living segments leading the way. Since 2015, both segments have added more than 500,000 units as they strive to meet rising demand. The assisted living category is experiencing the biggest building boom relative to the size of its inventory, having increased by 28% since 2014—by far the largest gain in the space. SENIOR HOUSING NEW CONSTRUCTION BY PRODUCT TYPE

10,000 15,000 20,000 25,000 30,000 35,000 40,000

Units

0 5,000

Independent Living Assisted Living Continuing Care/Life Plan Nursing Care

Source: NIC MAP

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VITAL SIGNS

Nursing care, which has the highest inventory by far, is seeing the least new construction. However, total inventory has declined. There are fewer nursing care units today than in 2014. With the exception of a handful of large transactions, investment sales volume has remained considerably off the pre-pandemic pace. The first quarter of 2021 was extremely slow with very little in broadly marketed opportunities. Since the start of the second quarter 2021, the sector has seen a significant uptick in opportunities coming to market. SENIOR HOUSING SALES

10.0 15.0 20.0 25.0 30.0

8.9

5.7

Billions of Dollars

0.0 5.0

Single Asset

PortFolio Entity Level

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

-10%

vs.’17-’19

average

-20%

-16%

Billions of Dollars

Independent Living

Assisted Living

Nursing Care

2017 2018 2019 2020 2021

Year to August

Source: RCA, Cushman & Wakefield Research

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Near-term (year one) underwriting remains more conservative, particularly for properties that require significant lease-up to achieve stabilization. We have also observed a heightened emphasis on replacement cost evaluation, particularly with respect to pre-stabilized assets. Senior housing buyers continue to be predominantly institutional private equity funds, although the public REITs have made large portfolio acquisitions and dispositions. With the lack of opportunities over the past year and the continued inflow of new institutional commitments to the senior housing space, there is a significant amount of dry powder on the sidelines that is increasingly eager to be deployed. As more value-add and distressed opportunities present themselves, we have seen a number of opportunity funds not previously in the space now aggressively pursuing value-add portfolios of older properties and/or those with lower occupancies. For high quality Class A or stabilized properties, the pre-pandemic buyers have remained consistent. In the current phase of the pandemic, most of the sellers that have come to market have been either publicly traded groups that are seeking to realign their portfolios and operator relationships or private sellers who are evaluating strategic exits where ownership has capitulated. We expect sales of full continuum product, particularly if fully stabilized, to remain brisk. And the active adult space appears to be emerging as a standalone asset class and is expected to perform well.

For high quality Class A or stabilized properties, the pre-pandemic buyers have remained consistent.

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VITAL SIGNS

Providing Healthy Returns for the Long Term As healthcare providers continue to adapt their facilities and footprints to address the operating requirements of the pandemic, we expect this real estate sector to continue to perform well. While some providers experiencing renewed surges of COVID-19 have halted elective cases temporarily to ensure patient safety, these have been limited in both geographical location and duration as of this printing. And although telehealth has enjoyed a recent surge in popularity, at this juncture, widespread adoption and use of telehealth has not substantially altered demand for medical office space. While the early months of the pandemic saw record rates of telehealth use, those rates have since subsided. Long term, we will track continued use of and watch for regulatory changes related to telehealth reimbursement that may affect future demand for MOB space. The healthcare sector may have experienced significant challenges and stress at the inception of the pandemic, but not only has it recovered and rebounded well, its overall outlook appears very good for the long term. Aging population trends across the world combined with advances in technology should open up tremendous opportunities for the sector overall, while continuing to provide healthy returns for its investors.

The healthcare sector may have experienced significant challenges and stress at the inception of the pandemic, but not only has it recovered and rebounded well, its overall outlook appears very good for the long term.

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Medical Office Capital Markets: Travis Ives Managing Director Healthcare Capital Markets travis.ives@cshwake.com Gino Lollio Managing Director Healthcare Capital Markets gino.lollio@cushwake.com

For more information about Cushman & Wakefield’s Healthcare Advisory Group, contact: Lorie Damon Managing Director Healthcare Advisory Practice lorie.damon@cushwake.com Contributors: Ken McCarthy Principal Economist ken.mccarthy@cushwake.com David Bitner Global Head of Capital Markets Insights david.bitner@cushwake.com

Senior Housing Capital Markets: Rick Swartz Vice Chairman Healthcare Capital Markets richard.swartz@cushwake.com Jay Wagner Executive Managing Director Healthcare Capital Markets jay.wagner@cushwake.com

About Cushman & Wakefield’s Healthcare Advisory Practice Cushman & Wakefield’s Healthcare Advisory Practice provides healthcare organizations with strategic and transformational real estate services that directly affect positive business outcomes. More than 300 real estate specialists drawn from a variety of real estate disciplines, including consulting, brokerage, project management, property/facilities management, and valuation, help clients make decisions that enhance patient care and accessibility, generate efficiencies across their platforms, and maximize the value of their real estate. In short, we assist in aligning real estate with healthcare missions, whether that focus involves executing on a single specialty, planning for new care delivery models, or combining multiple practices. Our expertise in the healthcare industry, combined with deep local market knowledge, strong relationships with health systems, physician practices, and other healthcare providers, allows for rapid response to our healthcare clients’ needs. Currently, Cushman & Wakefield has more than 35 million square feet of healthcare properties under management and executed more than $4 billion of healthcare

leasing transactions, and in excess of $2 billion in medical office and senior housing investment sales, equity, debt and structured financings, in 2020.

About Cushman & Wakefield Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with approximately 50,000 employees in over 400 offices and 60 countries. In 2020, the firm had revenue of $7.8 billion across core services of property, facilities and project management, leasing, capital markets, valuation and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.

Copyright ©2021 Cushman & Wakefield. All rights reserved. Publication Date 10.2021