Inflation, Interest Rates, & Seller/Buyer Discrepancy
2022’s elephant in the room of inflation, rising interest rates and market adjustments will certainly have a major impact for all the players invested in medical office and healthcare real estate. However, before everyone presses the panic button it is important to understand the different factors affecting today’s market and how pulling and pushing those levers will lead us toward the end of this year. They also work in tandem with one another and have a clear cause and effect relationship.
Starting with rising interest rates, the 75 bps increase by the Fed in mid June 2022 was the highest increase the nation has seen since 1994. Rising interest rates are one of the Fed’s tools to combat inflation. CPI (“Consumer Price Index”) increased to 8.58% YoY, which is significantly more than 2021’s trailing 5 year average of 2%. These rate increases obviously result in money costing more to borrow which affects our national economy immensely, not just medical office or real estate as a whole. How this affects our world of health care real estate and medical office can be manyfold.
First, the rate increases can shift the market from a sellers market (which we have seen to be the case over the past couple of years) to a buyers market rather quickly. If money costs more to borrow, naturally investors cannot pay the same premiums in cap rates and valuation multiples they have in years past. These cap rates will be forced to decompress and the inflationary value of the income in place, with set increases being outpaced by inflation, inherently hurt pricing.Download White Paper