Medical Office Buildings May Benefit From US Health Overhaul
December 31 2009 - 9:30AM
Dow Jones News
A U.S. health-care overhaul could be good news for such
real-estate investment trusts as Cogdell Spencer Inc. (CSA) and
Healthcare Realty Trust Inc. (HR), two health-care REITs that play
heavily in the medical office building sector.
Analysts say the possibility of millions of newly insured
patients is likely to be another boost for a sector that already
has a very positive long-term outlook.
Still, how much of an impact government health-care changes will
have remains unclear, since Congress is still trying to decided how
much of the health-care system will be changed under legislation.
In addition, the sector remains challenged by doctors' concerns
about their future reimbursement rates and patients' reluctance to
run up new medical bills in the midst of an ailing economy.
Earlier this year, real estate firm Marcus & Millichap
estimated that if 50% of the 46 million uninsured Americans gained
coverage under a new national health policy, the added demand would
require nearly 45 million square feet of medical office building
space beyond what is normally needed. To put that into perspective,
there's currently about 700 million square feet of medical office
space nationally, according to the firm's research unit.
What's more, Marcus & Millichap Managing Director Alan
Pontius said changes in health-care technology and data-center
needs will drive demand in the space. Namely, the American Recovery
and Reinvestment Act of 2009 allocated about $19 billion to help
compile electronic medical records for U.S. residents, which could
create a new tenant group for medical office buildings.
Major players in the industry have been taking notice of the
sector's potential.
All the health-care REITs "are trying to increase exposure to
the segment," said David Aubuchon, analyst at Robert W. Baird &
Co.
Medical office buildings often house doctor's offices, such
diagnostics devices as X-ray machines, and chemotherapy treatment
centers. Although the sector is fragmented with many small and
regional players, publicly traded health-care REITs own a sizable
stake in the billion dollar industry.
Medical buildings have generally fared better than traditional
office properties during the economic downturn, partly because
health-care services are more resilient during bad times. The aging
U.S. population is another reason for optimism for the health
sector, and existing medical buildings have also benefited from a
slowdown in new construction.
Such health-care REITs as Cogdell Spencer and Healthcare Realty
Trust, whose holdings are focused in medical buildings, seem poised
for an uptick in patients for tenants.
"If people are less dependent on the emergency room for care, I
think that's good for medical office and ambulatory care," said
Frank Spencer, chief executive of Cogdell Spencer.
It and other health care REITs have made no secret of their keen
eye for acquisitions.
In December, Ventas Inc. (VTR) acquired three medical office
buildings for about $62.5 million. A month before, Nationwide
Health Properties Inc. (NHP) reached an agreement in principle to
buy several medical buildings from Pacific Medical Buildings LLC,
restarting a deal that had been put on hold when the capital
markets froze up.
More deals are likely in the coming year if credit continues to
become more available, analysts say.
Yet hopes may be tempered should doctors get squeezed on
reimbursement rates under a new health-care overhaul, said George
Skoufis, credit analyst at Standard & Poor's, although he noted
there remains much uncertainty about the outcome of government
efforts to change the system.
And although watchers consider medical office buildings to be
resilient during an economic downturn, they have not been
recession-proof. With higher vacancies in 2009 compared with a year
earlier, due in part to some patients putting off medical care
while times are tough, rent growth has been limited in some areas
of the country, analysts say.
Still, despite some of the sector's near-term challenges, the
prognosis seems promising.
"It's a good long-term asset class," said Aubuchon.
-By Veronica Dagher, Dow Jones Newswires; 212-416-2261;
veronica.dagher@dowjones.com