Vital Signs December 2023: Healthcare Sector Outlook

VITAL SIGNS

Conclusion As rates and costs have risen in 2023, the healthcare sector committed to some major adaptations that offer some resiliency in the current environment. Health systems have actively worked with health plans and employers to better match care to cost. Against this backdrop, healthcare real estate has performed robustly from a leasing perspective. Occupancy remains near or above historically stable levels, and substantially higher than other major CRE asset classes, including commercial office. Absorption of new deliveries has also continued apace, with very little exits from committed projects. Despite a slowing construction pipeline, a growing labor pool and patient demand will continue to drive newer and well-amenitized healthcare spaces. In the face of past economic headwinds, the healthcare industry has been noticeably resilient. With healthcare spending set to linearly increase over the next eight years , we can expect rising demand for care nationwide—providing opportunities for continued growth of their offerings. As demand for outpatient care grows, MOB operators and health systems can continue to expand options for clinical care while adapting their real estate portfolios for greater operational efficiencies. The reduction in underutilized administrative space, the conversion of adjacent office to further clinical uses at a discounted price, and centralizing

care when hub-and-spoke becomes too operationally challenging are key steps operators are taking. The greatest challenge to the execution of some of these portfolio adjustments remains the slowing capital markets landscape. As with almost all other real estate asset classes, the healthcare sector will also need to wait out the doldrums of interest rate increases and stagnant liquidity. Owners and existing investors should take note that significant amounts of dry powder remain interested in the sector and have indicated that they are ready to move, once conditions improve. When that happens, asset owners should be prepared to move quickly on either further acquisitions or development plays. Ultimately, the challenges that the healthcare sector currently face are opening opportunities for both healthcare providers, who can devise novel strategies to address the immense and growing need for care in the nation, and healthcare real estate investors, who can navigate the crosscurrents of the capital markets, limited medical office building stock, and continued evolution in the manner and location of care delivery.

VITAL SIGNS 2022: PERSPECTIVES ON HEALTHCARE AND MEDICAL OFFICE BUILDINGS