6/6/2018 | By Jane Yi Zhang
Demand for health care services is likely to remain steady in the next decade or two as the baby boomer generation has just reached retirement age, according to health care REIT executives presenting at Nareit’s REITweek: 2018 Investor Conference.
“We will have demand as people live longer today,” said Debra Cafaro, CEO of Ventas, Inc. (NYSE: VTR). Businesses in senior housing, medical office building (MOB) and life science research are currently in a bright spot, Cafaro said during the conference.
Physicians Realty Trust (NYSE: DOC) identified the same trend. The company said they have already seen volume growth in their medical service assets.
The demand has already driven new medical real estate construction, which peaked during the second and third quarters of 2015, according to Robert Probst, CFO of Ventas. New development usually takes 24 months before it is put into use, meaning more supply came into the market starting at the end of 2017 and continued through 2018.
“We need to work through that and absorb those new units,” said Probst. “The encouraging news is looking beyond 2018, new development is coming down,” he said.
Meanwhile, as interest rates move up, banks are becoming more conservative on new construction loans. In addition, higher raw material costs, a low unemployment rate and potential tariffs have all pushed construction costs to a record-high level, executives said.
Physicians Realty Trust sees the slowing pace of new construction as an upside for the company’s existing assets.
“The higher construction costs give us the ability to push rates because the replacement cost is so high,” said John Thomas, CEO. “There’s no point for our tenants to move office,” he said.
An additional benefit for the REIT’s existing assets is coming from a large influx of private capital from around the world that is chasing medical investments. As medical assets are becoming more competitively bid, the valuation of the company’s current portfolio is getting higher, Thomas said.
However, the trend away from public to private capital also presents challenges to the REIT industry. Physicians Realty Trust, according to Thomas, has been having a hard time making new acquisitions as valuations are too high. In response, the company is seeking opportunities to partner with private capital.
Welltower Inc. (NYSE: WELL) is also putting its capital on hold as private capital is pushing the market higher.
“We’re going to wait for the market to come back to us,” the company said during the presentation.