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What a Difference a Year Makes: Evolving Capital Markets in Healthcare Real Estate
By Andrew Antognoli, Investments

Despite elevated interest rate volatility driven by geopolitical and domestic economic forces, healthcare real estate is once again proving its reputation as a resilient, low-beta sector. While broader commercial real estate markets remain in a state of price discovery, capital markets for Medical Outpatient Buildings (“MOBs”), Inpatient Rehab Facilities (“IRFs”) and Behavioral Health Hospitals (“BHHs”) are becoming more sanguine across the capital stack. Between new equity mandates entering the sector and existing names coming back into the fold, paired with increased debt liquidity, healthcare real estate transaction activity is beginning to thaw relative to years past.

We’ve seen a meaningful shift in the last couple quarters in the debt capital markets - with the competitive landscape between lenders more akin to the dynamic observed in 2021 through 2022. Banks that have been on the sidelines the past couple of years (or more) now have the green light to win deals and grow their exposure to the sector. Stabilized MOBs with credit tenancy and long-term leases still command the most attractive bank financing. Cross-collateralized, cross-defaulted portfolio debt facilities are back as well- achieving top of the market economics driven by lender preference for diversification and the ability to issue larger check sizes. Floating rate spreads for the best financings have recently trickled back into the 170 to 190 basis point range with the average stabilized financing falling between the 200 to 230 basis point range. Meanwhile, IRFs and BHHs, though backed by strong demographic tailwinds, still face greater scrutiny around operator experience and reimbursement structures. Stabilized product in these specialized asset classes, backed by investment grade credit health systems with 15 to 20 year lease terms in the top 25 MSAs, have increasingly garnered more interest from lenders as a way to achieve higher yields as MOB debt prices much tighter.

There is always room for more liquidity in the development financing space, – especially as the demand for healthcare services across the full continuum of care continues to outpace the current supply. Though pricing has tightened slightly in recent quarters, the most significant change for construction debt is the overall increase in both the number of lenders and the dollars they for ground up executions. Existing construction loan payoffs and increased quotas are both driving factors for this change. While lender sentiment on IRFs, BHHs and other alternative healthcare asset types has grown increasingly positive in recent years, liquidity for these assets still remains somewhat limited. That said, Anchor’s entrepreneurial ability to creatively structure traditional debt/equity or structured finance solutions (through our new Structured Finance platform) and continued lender familiarity with alternative assets can unlock opportunities where fundamentals remain inherently strong.

As we hopefully move into a new phase of rate normalization, Anchor continues to stay informed of what’s changed, what to expect next, and how investors can stay ahead in an evolving credit landscape.