Medical office buildings in Denver are in high demand as Covid subsides.
After two years of keeping their heads above water as Covid ravaged their industry, medical practices and clinics in metro Denver are seeing refreshed demand and new capital sources.
But amid the comeback, the healthcare sector is coping with talent shortages and uncertainty as the industry tries to push ahead with real estate decisions.
When Covid first set in, medical providers of all kinds — from hospitals to small behavioral health clinics — buckled in for the difficult road ahead, forestalling real estate decisions until the worst of the pandemic passed.
Many of the larger hospital systems are still in wait-and-see mode while Covid variants work their way through the population. But smaller private practice physicians and therapists find themselves with ballooning demand for their services, said Abby Bartolotta, vice president of healthcare solutions for JLL in Denver.
“There were a lot of delays during Covid. People were saying ‘I’ll renew now and deal with this later,’” Bartolotta said.
Now, that pent-up demand is making its way to deal volume. Over the last 12 months, absorption of healthcare real estate in metro Denver is up 220%, Bartolotta said. The area’s vacancy rate in the property type hovers around 10%, roughly in line with where it was before the pandemic.
At the same time that providers were postponing their real estate decisions, patients were putting off healthcare tests and screenings as they sheltered at home, resulting in an increase in chronic illnesses like diabetes and heart disease as Covid waned and people finally returned to the doctor.
Mental effects of the pandemic including increased rates of depression, anxiety and ADHD also led to a spike in demand for mental and behavioral health services, particularly for children, Bartolotta said.
All of this new demand means that clinicians need more space, something that private equity companies have noticed.
“Private equity has made a huge splash into healthcare,” Bartolotta said, noting that the influx of capital for smaller clinics, especially mental health providers, made a big difference in the types of spaces they’re able to lease.
“Behavioral health, you can usually find in a Class-B or C office building,” she said. “That’s been changing.”
Private equity firms are pouring money into healthcare real estate.
With some regulatory changes that make it easier for mental health providers to accept insurance and a fresh source of funding from deep-pocketed investors, these providers are able to move into nicer spaces in better locations, paying higher rents.
Private equity firms signed a total of $151B worth of healthcare deals worldwide in 2021, led by large transactions. Now in 2022, more deals seem to be in the offing, with projections showing that healthcare spending is likely to continue increasing by an average of 5.5% annually through 2027.
Other in-demand types of healthcare facilities are surgery centers, speech therapists and drop-in primary care centers where people can access treatment without going to the hospital, Bartolotta said.
And it’s not just leasing where healthcare-focused real estate professionals are seeing renewed interest.
A private Denver-based investor recently purchased a 241K SF healthcare and office portfolio in Colorado Springs, drawn by the property’s location and tenant base, and NorthWest Healthcare Properties REIT dropped $600M on 27 properties across the U.S., including one in Colorado.
Healthcare real estate has long been considered relatively recession-proof among property types, thanks to the fact that people will always need to access healthcare, even during a recession. That thinking seems to have survived the pandemic, despite any uncertainty that might linger about how the healthcare industry will recover, especially when it comes to medical office buildings and other smaller practice facilities.
A new report from CBRE indicates that 99% of healthcare investors surveyed said that medical office buildings were the most attractive product type in 2022, followed by ambulatory surgery centers, which garnered interest from 88% of those surveyed.
“Healthcare and life sciences have been historically resistant to economic downturns, and continue to be seen as a safe haven for real estate investors during times of economic distress,” said Chris Bodnar, vice chairman and co-head of Healthcare and Life Sciences Capital Markets at CBRE. “As a result, investors continue to allocate more capital to these properties, which provide stability and consistently strong yields.”