U.S. Healthcare & Life Sciences Capital Markets

Methodology

• This year’s survey contained 36 questions on various facets of the healthcare and life science real estate market.
• The survey was distributed to approximately 500 of real estate’s most influential healthcare real estate trusts (REITs), institutional healthcare investors, private capital investors and developers throughout the United States, with 108 providing responses.
• To ensure the accuracy of our survey results, we removed all duplicate responses from the same firms to ensure results are not overstated.

Highlights

This primary study generated qualitative industry data that provides an understanding of investor and developer return expectations, investment criteria and, most importantly, market shifts and progressions that these key professionals anticipate in the coming year. Among the most intriguing findings of this year's study include the following:

Investment Criteria
The 2023 survey results suggest a drop in capital allocated to healthcare real estate compared to the record high in 2022 but still above the historical average of $11.4 billion. In 2022, the total healthcare capital allocation provided by respondents in our survey was $17.1 billion, while actual transaction volume for 2022 ended at nearly $15 billion. This year, the healthcare capital allocation from those firms who provided a figure (56 out of 91 firms) totaled $13.5 billion, which represents a 24% increase compared to 2021. Based on our knowledge of additional capital sources entering the market and adjusting for historical activity, we estimate at least $18 billion of capital allocated to healthcare in 2023.

Figure 1: Capital Allocation to Healthcare Real Estate

Source: CBRE U.S. Healthcare & Life Sciences Capital Markets Investor & Developer Survey Results 2023.

2023 Challenges
Rising interest rates, surging inflation and general uncertainty plagued investor confidence in the second half of 2022 and continue to impact commercial real estate markets in 2023. Most healthcare real estate investors (75%) identify rising interest rates as the greatest challenge they expect to face in 2023, showing a continued focus on the debt markets and an eye to future Federal Reserve actions. The February banking crises shocked markets, pushing depositors and investors to big banks and risk-free assets, suppressing the indices. CBRE forecasts that we are finally seeing the light at the end of the interest-rate-hike tunnel and anticipates the Federal Reserve will raise rates one last time in May and could start lowering rates by the end of the year. Other top concerns for 2023 are gap in bid-ask spread (65%), shift in available financing (64%), and uncertainty of property valuations (57%).

Top-Performing Markets
Investors continue to be drawn to high-performing secondary markets, particularly. in the Sun Belt. Dallas, Raleigh-Durham, Charlotte, Nashville, and Atlanta are expected to outperform the others. The ongoing and rapid growth in the Sun Belt has been a huge boon to commercial real estate investors: People of all ages are increasingly drawn to the area because of its business-friendly environment, lower cost of living, high quality of life and mild climate. The Sun Belt now accounts for approximately 50% of the national population (326 million), with that figure expected to rise to 55% by 2030.

Return Requirements
Nearly 50% of respondents indicate that they will be using all-cash internal rates of return (IRRs) as their primary metric for investment in 2023, signaling a shift away from leveraged IRRs and going-in cap rates, historically the #1 and #2 responses, respectively. Cap rates have increased 100 basis points (bps) on average across all quality classes (Class A/B and on/off-campus), and on-campus assets get a 50-bps premium to off-campus assets. Around 84% of respondents (compared to 98% in 2022) predict that a market cap rate for Class A on-campus product will be less than 6.50% in 2023. Meanwhile, 87% of poll respondents (compared to 99% in 2022) predict that the cap rate for Class A, off-campus MOBs will be less than 7% in 2023. While healthcare fundamentals remain strong, interest rates and economic uncertainty have pushed cap rates and return metrics up from the historical lows experienced at the beginning of 2022.

Planned Investment Activity
The overwhelming majority of survey respondents (75%) indicate plans to be net buyers of medical office product in 2023. Of the respondents, 88% of all private capital and institutional healthcare investors consider themselves to be net buyers. Only 8% of healthcare real estate owners responded that they consider themselves to be a net seller of medical office product in 2023.

Life Sciences
Despite the challenges to commercial real estate, the life sciences market continues to grow. The life sciences industry in the U.S. saw a record level of venture capital funding in 2021, hitting a new high of $33 billion (CBRE Report). In 2022, venture capital funding for life sciences reached $21.6 billion, with the majority of that activity in the first half of the year. Even considering the relative dearth of activity for the second half of 2022, it is the third-highest year on record, showing continued growth in the sector. Of respondents who plan to be active in the life sciences sector in 2023, 88% will be a net buyer.

Market Fundamentals
While commercial real estate markets were severely disrupted in early 2020, the medical office sector had record years for transaction volume in 2021 and 2022. In 2022, commercial real estate markets were impacted again by seven interest rate increases by the Federal Reserve, weighing heavily on capital markets activity. Medical office portfolios around the country have proved to be incredibly stable, with 94% of respondents indicating that their medical office portfolio occupancy is either the same or higher compared to the previous year. The healthcare industry was truly tested by the pandemic, inflation and rising interest rates. Despite the headwinds of the last three years, healthcare delivery and care continue to grow, meeting climbing demand.