Chapter 6

Health System Monetization and Development Criteria

U.S. Healthcare & Life Sciences Capital Markets

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A portion of the survey was dedicated to medical office investors and developers seeking monetization or development opportunities with health systems.

Question 28

What is the minimum hospital credit rating you would consider for investment?

Compared to the previous year, sentiment shifted toward “upper medium grade: A- to A+” which nearly doubled from 2022 (12%) to 2023 (23%). Responses clustered at “lower medium grade: BBB- to BBB+” (55%), as investors drew a clear line in risk profile at investment grade credit. Speculative credit ratings and lower dropped from 47% in 2022 to 22% in 2023. Investors and developers are signaling an increased aversion to risk as they face economic uncertainty in the months ahead. Debt capital is most certainly fueling this investor sentiment, as lenders are focused equally on risk and commensurate credit rating.

Figure 35: Minimum Hospital Credit Rating

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

Question 29

What is the minimum lease term you would consider for a sale-leaseback by a health system?

Over the last five years, survey results revealed a settling over time of investor comfort with lease term of at least 10-14 years. In 2023, responses showed almost no deviation from that trend with the 10-14 years’ response increasing by 6% to 69% year-over-year but still in line with historical trends.

Figure 36: Minimum Lease Term

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

Question 30

What is the minimum annual rental rate escalation you would consider for a sale-leaseback by a health system?

In line with inflationary trends, rental rate escalation expectations shifted to the highest in the history of this survey, with the majority of respondents (44%) stating that they will require at least a 2.50% – 2.99% annual rental rate escalation. Only 5% indicate that they will accept an annual rental rate escalation of less than 2.00%, while 61% indicate that they will require an annual rental rate escalation of 2.50% or more, a 41% increase from 2022. It is now well documented that when annual inflation peaked at 9.1% in June 2022, it was the highest on record since 1981. Inflation has cooled off to 6.0% as of February 2023, but investors are still pushing for higher rent escalations.

Figure 37: Minimum Annual Rent Escalations

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

Question 31

In your experience, what percent of the time do hospitals exercise their Right of First Refusal (ROFR) to purchase the medical buildings on their campus as outlined in a typical ground lease?

Figure 38: Hospital ROFR Usage

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

Question 32

In your experience, what percent of the time does the hospital have a price floor on their purchase option as part of the ground lease?

Approximately 67% of respondents indicate that they see a price floor on a purchase option included in the ground lease up to 30% of the time, while only 12% indicate that they see a price floor on ground lease purchase options more than 70% of the time.

Figure 39: Purchase Option Floor Price

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

Question 33

What is the minimum ground lease term you would consider for investment (including extension options)?

Results suggest that healthcare investors and developers continue to prefer ground lease terms over 60 years (74%). More than 80% of REITs, institutional investors and developers require ground leases with at least 60 years of term remaining. Investor preference for more than 70 years of ground lease term increased by 13% year-over-year.

Figure 40: Minimum Ground Lease Term

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

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