Last week, team Meridian attended the 14th annual InterFace Healthcare Real Estate West conference, hosted in downtown Los Angeles. Meridian CEO, Mike Conn, and Chief Financial Officer, John Pollock had the opportunity to participate as speakers. Meridian Senior Vice President, Acquisitions, R.J. Sommerdyke and Project Director, Arturo Nunez were also in attendance. Mike spoke on the State of the Industry Report & 2024 Outlook opening panel, and we highlight some key takeaways in today’s blog post.
State of the Industry Report & 2024 Outlook
The panel kicked off by agreeing that 2023 was a challenging year for real estate. Sales volume equaled $8 billion – the lowest it’s been in a decade with the 4th quarter way off historical standards. Luckily, things are looking to change in 2024 for the better. In addition to Meridian’s Mike Conn, panelists included: PJ Camp, H2C Fifth Third Capital Markets.; Jon Foulger, MedProperties Realty Advisors, LLC; Casey Pileggi, Healthcare Realty; and, Zach Holderman, CBRE as the moderator.
Forecast for 2024
The panelists agreed that transactions should be above what they were in 2023. Systems are in capital conservation mode so are open to outside capital and private developers more than ever before. Conn predicts transaction volume at $10-$13 billion, picking up in the second half of the year. Development yields are higher as construction costs go back to being semi predictable, but still escalating. Providers continue to want to move treatment out of the acute care setting into ambulatory facilities as those settings are less expensive to deliver care, resulting in greater efficiencies and ultimately greater operating margins and profits.
Office Market/Economic Conditions
According to Camp, current economic conditions are pushing more investors into the healthcare market as it seems to be the best performing sector right now. Foulger noted that as institutional stakeholders enter the market, they gravitate first toward class A MOB’s, then on-campus healthcare buildings, then to credit rated assets. After that they consider moving to outpatient clinics and physician groups. Holderman mentioned that medical space is still being lumped into the office asset class, which is creating issues. The audience asked if there will be a window for lenders to lend before office sector issues come to a head. Camp feels that lenders / banks have already baked that into allocation, so it shouldn’t be a problem.
Debt Markets
The current scenario presents a unique economic landscape with the Federal Funds Rate reaching its highest in 22 years at 5.25%. Inflation is hovering in the mid 3%, and the stock market is anticipating six cuts while the Federal Reserve suggests a more conservative estimate of three. Given the election year, pressure to reduce rates is anticipated; however, the likelihood of a Fed interest rate cut in March seems low, potentially deferred to mid-year. There is a renewed focus on Debt Service Coverage Ratio (DSCR), overlooked in the past five years, calling for renewed allocations. In this volatile environment, preferred equity could serve as a bridge, and structured financing might be employed to raise capital.
Leasing Market
National occupancy is sitting above 90% and includes a 4% average rent growth. 3% seems to be the norm for new deals, and renewals are often being marked to market at much greater increases. This indicates a very healthy market and lots of renewals and new deals happening. Higher than usual construction costs continue to be an impediment to doing more deals on tenant improvements and new construction. Many are offering large improvement allowances and amortization to tenants. Finding financing solutions for tenant improvements will be crucial moving forward.
There is so much to consider as healthcare real estate braces for another unpredictable year and we’re all hopeful it will be more prosperous and stable than it was in 2023. Meridian looks forward to continuing our mission to provide greater access to care at more affordable cost in our communities as we dive into 2024.
If you’re interested in learning more about this conference, visit http://interfaceconferencegroup.com/.
Author: John Pollock