Archives for February 2023

Nationally it appears that there is insufficient square footage available to accommodate the significant growth seen in the healthcare real estate sector, with the rate of absorption outpacing new product deliveries, according to Northmarq.

“This has put national occupancy rates for medical office at a historic high,” Colin Cornell, Northmarq vice president, healthcare investment sales, tells GlobeSt.com.

“We anticipate a steady stream of opportunities for investors in 2023, including newly developed facilities, new long-term leases on historically vacant MOBs, and retrofits of what were historically retail-oriented buildings.”

Cornell said that like most sectors, healthcare has been in the price discovery stage since interest rate increases began, but values seem to be settling somewhere between 2019 and 2021 levels.

“The investor demand is there, and the question is will owners be willing to meet that demand at the new return buyers requires,” he said.

These investors are best to focus on outpatient services, according to JLL’s most recent Healthcare and Medical Office Perspective, which shows that outpatient sites dominate healthcare services delivery compared to hospital admissions.

Additionally, according to Kaufman Hall National Hospital Flash Report, outpatient revenue rose 8% in 2022, while inpatient revenue was flat when compared to 2021.

JLL’s report said that up to a third of hospital revenue is activity shifting to ambulatory surgery centers, office-based labs, and other ambulatory sites.

“More sophisticated procedures can be done in outpatient settings than possible a decade ago.” Amber Schiada, head of Americas work dynamics and industry research, JLL, said in prepared remarks.

“Innovation in care combined with reimbursement pressures are driving a sustained shift to outpatient facilities, and consumer preferences for outpatient care have increased as well, as outpatient facilities are often more accessible or conveniently located,” she said.

“Furthermore, experience shows that outpatient locations are less expensive to build and operate, produce better-quality medical outcomes, and yield higher rates of patient satisfaction.

MOS and Health Care RE Producing Income

Allan Swaringen, President & CEO of JLL Income Property Trust, tells GlobeSt.com, “Medical office space, and healthcare-oriented real estate more generally, will continue to be a key piece of an income-producing, core fund such as JLL Income Property Trust.

“The extremely positive demographic trends driving tenant demand for this sector, combined with the often-long-term leases of tenants who look to serve their local population and often invest heavily in building improvements, create a scenario where owners can generate long-term, stable cashflow,” he said.

“That’s why we have continued to construct a geographically diversified healthcare-oriented portfolio that today is valued at nearly $635 million and totals approximately 1.4 million square feet.

The Continuum of Care

Andrew Salmon, chief future officer at SALMON Health & Retirement, tells GlobeSt.com that given the aging demographics, “it’s no surprise that we are seeing an explosion in need for outpatient facilities.

“What’s pivotal is the consideration for the continuum of care, as the 80+ population is forecasted to balloon nearly 50% in the next 10 years, and they will require both inpatient and outpatient opportunities as they age.

“Our goal is to establish the continuum of care across the aging population, to ensure that independent and assisted living opportunities exist with convenient, local access to major medical providers, allowing our residents to maximize the outpatient system while maintaining independence.”

Outpatient Services Leads to Higher Satisfaction

Doug King, national healthcare sector lead for Project Management Advisors, tells GlobeSt.com that healthcare providers have been actively positioning outpatient services closer to where their patients reside for at least a generation.

Outpatient facilities typically result in higher patient satisfaction, King said, and the challenges to outpatient facilities presented by telehealth and home healthcare are minimal as many clinical limitations and regulatory challenges exist for these two off-site methods.

“Decentralized ‘brick-and-mortar’ outpatient facilities will continue to grow,” according to King. “A vast majority of care will be occurring in outpatient settings, including urgent care centers, free-standing emergency departments, medical office/doctor offices, and ambulatory care facilities – outfitted to accommodate same-day surgical activities.

“In healthcare, we say, ‘follow the money’ and The Center for Medicare and Medicaid services are reviewing how reimbursement strategies can promote this model. An example is the growth of OBL (office-based labs) to house sophisticated surgical and imaging services performed on an outpatient basis.”

Developing, Rehabbing, Modernizing Facilities

Mitch Creem, principal of GreenRock Capital, tells GlobeSt.com that investors have always viewed medical office buildings as safe investments during uncertain financial times, primarily due to their historically proven resiliency during market downturns.

“But now, 75 years after the Boomer generation was born, we are expecting a ‘gray tsunami,’ fueling the need for additional healthcare services and many more sites of care,” Creem said.

“Physicians, hospitals, real estate investment funds, and individual investors are all keen on developing new sites or rehabbing and modernizing existing buildings to provide state-of-the-art care and attract new patients.”

Deliver Care in Outpatient Settings More Economical

Brian Edgerton, senior vice president, healthcare services team – NAI Hiffman, tells GlobeSt.com that after historic growth in 2021-2022, the sector is not without headwinds.

“It saw rising cap rates and fewer starts and deliveries at the end of 2022,” he said. “In 2022, healthcare real estate developers kept busy delivering modern medical office buildings to accommodate health systems and large multi-specialty practices, including those seeking to consolidate multiple specialties under one roof in highly visible, patient-proximate locations.

“At the same time, developers are feeling the squeeze of construction cost increases, supply chain delays, and interest rate hikes, all of which are reflected in the higher rental rates that must be charged to make these deals pencil out.

“Yet, even if they’re paying more today than they would have a year ago, it is still more economical and efficient for providers to deliver care in outpatient settings, many of which are located in close proximity to where their patients live and work.”

Edgerton said that like retail, healthcare increasingly follows rooftops, “so services are moving closer to the patient thanks to technological advancements that can more easily be implemented in newly developed and repurposed buildings, rather than the medical office building of 30 years ago.”

When Choosing Project Sites, Demographics Matter

Craig Gambardella, vice president at TSCG MD, tells GlobeSt.com that clients understand that their property, and a potential fit for an outpatient healthcare facility within that particular property, is crucial in their decision-making.

“You must look at demographic, psychographic and prevalence of diseases in certain trade areas, and 5- to 10-year projected growth of not only disease prevalence, but how that translates to outpatient demands to help health systems forecast potential growth,” Gambardella said.

For example, the owner of a large mall that is looking to repurpose a portion of it into medical must accurately forecast the demand in that area for an outpatient facility, what types of clinical services may be needed, based on disease prevalence and 5- to 10-year projected growth, he said.

A Continued Extension of Outpatient Services

Rich Steimel, senior vice president and principal in charge, healthcare, New York, at Lendlease said that throughout the industry, more procedures are taking place away from the main clinical facilities as there is a continued extension of outpatient services across metro areas and into the suburbs.

“This shift allows hospital campus operations a greater opportunity to expand and connect with a growing base of patients who require critical care but desire the convenience of off-campus facilities.”

Source: “Outpatient Health Care Services Driving CRE Income“

AMC, Bed Bath & Beyond, Belk, Cineworld, Party City and Rite Aid top Green Street’s list of the most at-risk publicly traded, mall-based anchor tenants, landing in the “critical” category, according to a new report from the firm.

As part of its analysis, Green Street tracks operational health, balance sheet, and stock performance, as well as credit agency ratings. But “the ‘critical’ category, where retailer bankruptcy is likely imminent, is far less crowded than it was in ’19 as pandemic-related bankruptcies have cleaned out a fair share of struggling retailers,” write the firm’s Vince Tibone and Emily Arft — who also say mall REIT exposure to at-risk inline retailers is “minor.” Overall, the pair say tenant watchlists are “far less crowded” than they were prior to the pandemic, and near-term bankruptcy risk is slanted toward anchor tenants.

In addition, from a merchandising standpoint, landlords are shifting away from purely apparel concepts while growing entertainment and F&B, Green Street analysts say.

“There is no one retail model for a mall’s optimal tenant mix,” Tibone and Arft say. ”Instead, landlords are appropriately re-merchandising malls to 1) match broader secular changes in consumer demand, and 2) tailor the shopping experience to better serve the local community. Apparel continues to represent less and less of a mall’s overall ecosystem. Retail is a Darwinian business that will truly never stop evolving.”

Tenant mix also varies across mall grade as well, except for department stores which typically occupy 30% of total square footage. But “apparel takes up considerably less space at lower-quality properties as national retailers have left in mass while new or expanding brands have little interest in this segment of mall real estate,” Tibone and Arft say. And while some legacy retailers like The Children’s Place and Signet Jewelers are right-sizing their footprints in response to e-commerce shifts, brands in the digitally native, entertainment, athleisure, and luxury categories are selectively expanding in some malls (but also in strip center, street retail, and stand-alone locations, Green Street analysts say).

High-end tenants are performing well on both sales and margins in the wake of COVID-19, with the latter metrics improving “dramatically” over the past few years and now are “well above” national retailers. Operating margins are slumping for middle-market national retailers, however, and sales now lag luxury tenants “by a sizable margin.”

“It appears expense and inflationary pressures have yet to make their way to many luxury retailers’ bottom lines as affluent consumers have done well since Covid,” say Tibone and Arft.

Source: “Retail Tenant Watch List ‘Far Less Crowded’ Than Pre-COVID“

Rents may be falling but fundamentally multifamily fundamentals are very strong. Widespread distress is highly unlikely to happen; indeed forecasts for the asset class’ long-term growth are quite rosy.

But for investors eager to get a cost-effective foothold in this category or expand their holdings, here is an emerging opportunity: developers or owners that are highly-leveraged and unable to make debt payments as interest rates rise, according to Jahn Brodwin, senior managing director and co-leader of the Real Estate Solutions practice at FTI Consulting.

This group will need rescue capital – most likely mezzanine capital – to help them rebalance their capital stack, he says.

It’s not a bad place to be, distress-wise, he says, as there is plenty of capital waiting to swoop in for such opportunities.  “‘Bad distress’ is having acquired a property that is now generating lower NOI. But you don’t see too much of that.”

There also won’t be that many opportunities in this category, Brodwin continues. “Most people didn’t overleverage significantly. There has been a lot of discipline.”

But for those that did, it is easy to see where the struggle will be. The property has likely remained stable and the owner probably borrowed at a 3.5% rate. Then they put in mezz debt and leveraged up to 80% basically taking out their equity. Now it’s coming due and the refinance rate is, say 7%. The owner must put the equity back in but the market won’t allow them to finance the property at the level anymore. So they will either have to come up with the cash or put the property on the market. “That is where the distress comes in.”

While there may be some distress sales, Brodwin believes most will bring in new partners to refinance. “There will be good opportunities for mezz lenders. The original equity owner will just have to sit on the sidelines and wait for inflation to catch up or wait for interest rates to come down again and then refinance out of it.”

Patience in general is a virtue for multifamily owners, he adds. “Very few people get rich quick on multifamily. The long-term hold is the path to wealth.”

There is another possible source of distress on the horizon, Brodwin says, but this will be more of a local issue: government regulations such as rent control are increasing and when they are put in place they scramble the assumptions that buyers originally made about their properties. “People bought apartments, overpaying for them often, in New York City with the thought they would raise the rents to market rates. But they can’t do that anymore. That is very unfair of the government.

“People are making business decisions assuming they have a stable set of rules they can count on and when the government changes the rules that can change values.

“That is something to be nervous about.”

Source: “Here is Where You Will Find Distress in Multifamily“

Walmart Inc. inched closer to a $15 minimum wage last month, drawing tepid praise from even some of its strongest critics. The largest US employer joined Macy’s Inc., CVS Health Corp. and Target Corp., all of which have raised starting wages in the pandemic era of labor shortages and soaring inflation. While $15 (or $14 in Walmart’s case) is just enough for a full-time worker with no children to live in the US county with the lowest cost of living, these are moves in the right direction.

Still, a crucial element missing in conversations around minimum wages and the retail industry is automation. Already in motion before the pandemic, automation has kicked into high gear since, with retailers turning to self-checkout, robotic sorting machines and automated customer service to run their businesses at a lower cost. For companies, that’s good news. But for retail workers, it’s complicated.

Short term, fewer low-paid workers will be needed because of cheaper and more efficient robots. And while starting wages may increase for those who remain, fewer hours will be available as companies look to control costs, which won’t necessarily translate into increased income. As the country recovers from the economic devastation of the pandemic, companies and policy makers have a long-term opportunity to invest in reskilling service workers rather than treating them as a cost that needs cutting and forgetting.

Historically, companies ramp up restructuring after large economic shocks with an eye toward labor-saving technologies. For instance, new firms popped up in the fallout of the great financial crisis that automated the tracking of freelancers, generating tax returns and others tasks across production lines. This time is no different. As retailers brace for a possible recession (mild or not) and recover from a period where service workers were in short supply, they are looking for ways to stave off future labor disruptions and keep their businesses running smoothly.

Walmart employs roughly 1.7 million workers and has made moves recently that suggest it is reorganizing its labor force. Chief Executive Officer Doug McMillon told investors at a conference in December that, while still years away, automated warehouses full of unmanned carts will one day move and sort products and may also unload store deliveries, “eliminating a lot of the hours that we invest in today in the back room of our stores.” With lower labor costs and added income from advertising and fulfillment services, “that’s when you have a more attractive income statement,” he said. Amazon.com Inc., which employs around 1.5 million people around the world and raised its average starting wage last fall to more than $19 an hour for most warehouse and transportation employees, is on track to use more robots than people by 2030, predicts Ark Investment Management CEO Cathie Wood, who invests in disruptive innovations.

Walmart and Amazon are not alone in their automation investments as they also raise wages. Macy’s has rolled out new semi-automated systems that reduce the amount of warehouse space needed to fulfill online orders. CVS uses Microsoft Corp. technology to automate its prescription and refill intake. With storelfilling most of its orders, Target depends on predictive inventory positioning tools to anticipate demand and is experimenting with automated sorting devices. Three of the five most automated jobs across corporate America are in retail, according to the most recent estimates from McKinsey & Co. published in 2019. Given what’s happened since, the industry stands to be disproportionately disrupted by automation.

We’re not in our robot apocalypse era — yet. Retailers have been relatively conservative in reducing their workforce compared to tech companies, for example, in recent months. Instead, they’re letting natural attrition do most of the work for them and using technology to fill the gaps. While retail has added jobs over the last two years from its plunge in March 2020, it has still lost nearly 400,000 jobs since its pre-pandemic peak in 2017.

So although hourly retail wages are rising, automation will reduce the avenues available to low-skilled workers, further increasing the gap between rich and poor. A 2021 International Monetary Fund analysis found that in previous post-pandemic eras inequality increased more for economies with high robot density and new adoption because automation often replaces the routine tasks done by lower-paid workers. More educated workers with higher incomes are likely to benefit because they’re building the robots, not losing job opportunities to them. ChatGPT and AI-enabled programs like it may well change that with time, but not yet.

This reshuffling of the labor force comes after pandemic shortages briefly infused workers with more power than they had in decades. Retail workers, fed up with angry customers and abuse in stores over masks and social distancing policies, left the industry in droves to search for better jobs. Companies added new benefits like paid sick leave, hazard pay and annual bonuses — benefits worker advocates had been pushing employers to offer for years. At the same time, public empathy helped fuel support for union efforts at Starbucks Corp., Amazon, Apple Inc., Target and Recreational Equipment Inc.

Now, the scales are tipping back in favor of retail employers and automation is only strengthening that position. Companies would be wise though not to discount their workers. Robots can’t completely replace people and resistance to automation can undercut the value of such transformations for companies. It’s also more effective — both on cost and in strengthening corporate culture — to retrain an existing employee than hire a new one.

Some retailers are heading that way. Walmart, for example, launched a global education program last year where associates can learn new job skills as part of their ongoing adoption of technology, build leadership skills, and work toward college degrees to advance their careers. Whether or not this will lessen automation’s blow to the retail workforce remains to be seen. But, there’s little question it’s a step in the right direction.

Source: “Raises for Retail Workers Won’t Protect Them From Automation“