This week, members of the Meridian team gathered in sunny Scottsdale, Arizona to attend GlobeSt. Healthcare’s 2021 conference. Held at the Fairmont Scottsdale Princess, the event brought together a variety of industry leaders including owners, investors, developers, brokers and more. The theme of the conference was the industry’s challenges and wins throughout 2021 and looking forward to what the next year will hold. We summarize some of the details from the keynote presentation, given by John Chang, Senior Vice President, National Director Research Services at Marcus and Millichap, below.
Challenges
The economy has recovered 80% of the 20 million jobs that were lost at the onset of the pandemic. However, open positions exceed job seekers by about 3 million. The deficit in labor closely matches the approximately 3 million people that have left the workforce by either retiring or relocating to markets where only one adult works. As a result, this labor shortage could slow the pace of growth in the healthcare industry. In terms of inflation, the headline inflation rate is 6.2% and has not been this high since the 1990s. This rate is well above the Federal Reserve’s target rate of 2% and poses a threat to the industry as well. Additional challenges include:
- COVID-19 variants, like omicron
- Cost of labor
- Supply chain disruptions
- Waning confidence
Wins
As we know, older folks visit healthcare providers much more frequently than younger cohorts, and with the aging Boomers this translates to a 28% increase in demand for healthcare services over the next 10 years. It is also important to note that this increase in demand will vary by market. There is a migration trend by those over 65 years old toward warmer climates in the south, like; Florida, Texas, Arizona and Las Vegas.
Healthcare spending is at 18% of GDP and as the US population continues to age that number is expected to grow to 19%. Interestingly, medical office absorption throughout the pandemic remained positive and currently the national vacancy is at 9.6%. The slowdown in development activity during the pandemic will cause vacancy rates to decrease, but investors need to evaluate the facts on the ground as each market is different.
In terms of cap rates, the rate of compression over the past 4-6 months has been unprecedented and Mr. Chang estimates that has been around 75 bps. Investors selling out of other asset classes, like multifamily, find the yields in healthcare attractive. Additional positives for the industry include:
- Vaccines, psychological recovery, and a return to in-person events demonstrate a slow return to semi normal behavior
- Elevated demand and record high savings
- Financial liquidity
- Low interest rate environment
- $1.2 billion infrastructure bill
- Corporate profits are at record levels
- Retail sales and consumption are at record highs
In conclusion, John Chang’s assessment for 2021 and beyond was positive. The wins are outweighing the challenges and 2022 should be an exciting year for the industry as we continue to grow and navigate the ever-changing world of healthcare real estate.
If you’re interested in learning more about this conference, visit GlobeSt. Healthcare Real Estate 2021.
Author: John Pollock