2022 Year End

Approaching the yellow light: Looming disruptions still have no effect on the most “resilient” asset class

Healthcare real estate was tested across the board in 2022. From economic uncertainty to inflationary pressures, which should be working against investment sentiment toward the asset class, much of the opposite has occurred with record breaking investment every quarter throughout the year. In the face of all these pressures and disruptions, investors seem to believe that healthcare real estate is a “safe haven” asset class during uncertain times. According to Jim Kornik, a 30-year industry veteran and a Principal at Avison Young, “Right now, the cost of debt has not just doubled but has become harder to get. Healthcare providers have been hit hard by inflation and worker shortages.” We agree. These signs, despite investors continuing to converge to the asset class, should not be entirely ignored. Pressures should start to push pricing downward as sellers come to terms with the market, and cap rates will have to compensate for new debt as they have through 2022. Cap rates ticked up both in Q3 and Q4 of 2022 across all asset classes according to data acquired through Revista and Cushman Wakefield. 1031 buyers have been the most active in the marketplace due to selling at peak values in 2021 and early in 2022. However, those buyer exchanges will continue to expire and the market will have to catch up to current values. This nevertheless will not stop activity. Sellers’ desire to sell will remain for different reasons. No longer will the low cost of debt and record pricing influence sales. Kornik says that sellers will be motivated by a “change of circumstances, alternative uses for capital, rebalancing of portfolios and end of fund lives.” 2023 will be a continued navigation of values as sellers
and buyers figure out their own motivations despite disruptions and pressures the industry faces as a whole. Hopefully, this will lead to opportunities for investment as physician groups will look to unlock equity to stimulate their business.