Interview With Michael Moreno & Rahul Chhajed
Q: Can you describe how you approach mentoring and developing new agents in the division to become successful in brokerage?
A: Rahul and I are both extremely hands-on when it comes to mentorship. When bringing someone on, we look at them as a partner, not just someone we will give a couple of pointers. We are truly invested in their success and want to ensure they build the foundational skills necessary to become a long-term staple in this industry. Because of the amount of time we give our junior agents, we’re very selective about the agents we bring on. We only want to work with agents who are as committed to their own success as we will be.
Q: How does healthcare real estate differ from net lease or other property types, and are there any specific nuances?
A: The biggest differentiator between healthcare and traditional net leases is the business behind the walls. Healthcare businesses have a completely different set of rules to follow compared to their retail or industrial counterparts. There’s also a lot more specialization and, therefore, typically higher buildout costs that go into building a healthcare facility than you would find in a non-healthcare one. To invest intelligently in healthcare, you need to have a keen understanding of all of these nuances.
Healthcare real estate has been a model of stability for the industry throughout this last cycle. It is the asset class that institutions and investors have gone to because they are looking for long-term stable returns. We saw some cap rate compression throughout 2020 and 2021, but typically, healthcare is traded at a discount to other asset classes like retail and industrial. If I am a buyer, I look at it and say, “This is a great business model that obviously faired extremely well throughout COVID-19. It is e-commerce, recession, and pandemic-proof.”
Healthcare is also completely different from the other asset classes because it is constrained by the number of physicians that come out of med school and are able to operate in these facilities. This is also a significant bonus, as having a building leased to a doctor implies a likely reluctance to relocate due to the substantial investment in that specific property. The physicians who open these sites have the mindset that they will be operating there for their entire careers. That is obviously a very good thing to hear from your tenant if you are a landlord.
Q: What attracts investors to the healthcare space, and what do the fundamentals look like today?
A: Security and safety are significant attractions for investors. You can get some higher returns in healthcare compared to other asset classes. The recession-proof nature of this asset class is a huge driving force. There are also opportunities for consolidation in the space, which do provide credit enhancements. For example, you can buy a building leased by a one-practice physician group, which then gets acquired, and now you go from a tenant with $5 million in assets to $5 billion. That is obviously going to increase the value of real estate.
Regarding fundamentals, a significant one to note is that healthcare assets usually have higher cap rates in healthcare versus other asset classes.
Q: Can you give an example of a challenging healthcare investment property deal you were involved in and how did you navigate it?
A: The hardest healthcare deals to navigate are very common in the healthcare space, where you have groups selling their practices, either immediately after a real estate sale, before a real estate sale, or simultaneously, and that is the most challenging deal to work. Many times, we will have a deal where we are selling a building, and then the physician is also simultaneously selling their practice to somebody else, so they have to either close on the real estate side and execute a lease with the buyer and then sell the practice. Or to sell the practice and then sell the building, something most groups would prefer. Sometimes, this comes up while we are in escrow, and we need to know how to manage the buyer’s expectations.
Q: How do you assess the value of a healthcare investment property, and what factors do you consider in determining its worth?
A: It is pretty similar to other asset classes. We are really looking at the lease, which is the value of the building. Some other nuisances include the lease term, rent per square foot, creditworthiness, the tenant, etc. The main difference in healthcare is what type of practice is operating there, so a primary care clinic is going to trade at a bit of a disconnect compared to a surgery center. Acuity is critical in this space, which means a higher level of service being provided in those facilities. You have to understand who’s the tenant because those higher acuity locations typically come with higher tenant investment.
Q: What are some current trends or developments in healthcare real estate that you believe will have the biggest impact on investment sales in the coming years?
A: The continued roll-up of healthcare practices will continue to have the biggest impact in the space. There is a good that comes from the roll-up strategy in terms of consolidating and economies of scale. Not only will the growth in private equity in healthcare continue to change, adjust, and benefit the industry, but also, the fallout from some of the private equity investment in the space will have some ripple effects in the industry.
In regard to telehealth it is a great supplement to healthcare, but it is not a replacement for healthcare. Telehealth can replace some lower acuity services, but patients really do prefer to be in person with their doctor. There are some specialties in healthcare that are going to be affected, such as the mental and behavioral health spaces. We tend to focus on asset classes that aren’t as affected by telehealth, such as dentistry, veterinary, dermatology, surgery, etc.
Q: Are there any specific niche sectors within the healthcare real estate space that are becoming more popular, and why?
A: A lot of people’s first entry into healthcare is dialysis clinics. However, there are so many other specialties that people don’t realize that are big businesses and investments to look at. Surgery centers are probably the fastest-growing sector in healthcare. Also, the dental, veterinary, and urgent care spaces are great investments. Also, consolidation in the space is a great opportunity.
Q: Can you discuss financing healthcare investment properties, and has the current market impacted the sector at all?
A: Healthcare has similar financing to other asset types, and rates have affected everybody. Many of the larger institutional lenders have also pulled out of the space, so it’s not the greatest financing market right now. The good news is there is still a lot of private capital chasing these deals and exchange buyers that are typically low leverage. Banks are still lending; you just need to make it worth their while.
Q: What advice do you have for individuals looking to invest in healthcare real estate, and how can they best position themselves for success in this market?
A: If I am going to invest in this space, I need to specialize or focus on one thing. Either I will focus on one market and buy healthcare there because I can better understand the rents, tenants, demand, vacancy, etc. Or I am saying, “I just really love the dermatology space,” so then I will focus on buying dermatology spaces and educating myself on dermatology clinics. There are just so many more nuisances in healthcare compared to other assets, which makes a significant difference when investing in these properties.
Q: How do you tailor your approach to meet the specific real estate goals of different types of clients, such as physician groups, private equity groups, and private investors?
A: Really just listening. Every group has different goals. You can’t take the same approach to an individual investor that you would take to a private equity group or an institutional one. It is all about listening to their needs, pricing goals, portfolio strategy, and target markets so they can provide the solutions that will help drive their businesses to grow.
Q: What do you see as the biggest opportunities in the healthcare real estate market currently, and how are you positioning your clients to take advantage of them?
A: The opportunity is to buy right now. 2020 was a crazy market, but it showed us that if you just buy right, there will typically be an opportunity to make some money. The markets have shown that they will come back. You need to make sure you are buying right and make sure you are staying in the game. There are going to be some opportunities for cap rate compression and to make some money on these deals. Make sure when you are looking at these deals to underwrite the credit of these tenants, the real estate fundamentals, and the rents.
Q: Can you explain how the pandemic affected the healthcare real estate market and how the market has adapted to these changes?
A: All the pandemic did was help the healthcare real estate market. The markets adapted by more entrances in the space, and there was a lot of cap rate compression for a while.
