Hot Spots in Healthcare: Top Markets to Watch

The U.S. has the largest healthcare industry in the world, and the strength of the sector has leveraged major players in the market. With more Americans turning 65 every day, the need for care centers and medical office buildings (MOBs) will only expand. Furthermore, the longer people live, the more medical assistance is required to maintain a good quality of life. Markets will need to adapt to high rates of chronic health conditions and costly expenses in technological adoption will continue to put the healthcare asset class on an upward trajectory.

 By 2034, the 65-plus population will outnumber children for the first time in U.S. history. By 2060, nearly one in every 4 people in the U.S. will be 65 years old or older, according to the United States Census Bureau.

The transition to outpatient care is an ongoing trend that accelerated during the COVID-19 crisis. Outpatient care helps reduce the strain on hospitals, allowing them to focus on treating patients who don’t require hospitalization. As a result, outpatient facilities present a lucrative opportunity for real estate developers and investors. In addition, consumers are more focused on behavioral and mental health than ever before, pushing the need for mental health services and facilities.

Total national health expenditures are expected to reach $5 billion by 2025, according to the U.S. Census Bureau.

The states below top the healthcare industry’s ‘markets to watch’ list, with an influx of patients in need and offering bountiful investment opportunities.

North Carolina

North Carolina is seeing an average net arrival of 150 people per day in the state. This is due to several factors, including the state’s relatively affordable housing, impressive hospital systems, and thriving local economic system. North Carolina is especially attractive to outside investors because it is a certificate of need state (CON); where providers must apply and pay fees to open new clinics. This requirement deters providers from exiting properties to avoid hefty upfront costs and fees, in turn, securing long-term tenants for investors. North Carolina also has a lower patient-to-primary care provider ratio (1405 to 1) than both South Carolina and Georgia, meaning the population has access to more clinicians than most of its neighbors.

Current development will bring more medical professionals to the area making the state a hub for healthcare investments. Therefore, the state will offer opportunities for investors to diversify portfolios, outside of just owning MOBs.

According to a ranking by CNBC, North Carolina is the #1 state for business in 2022.

WakeMed Health & Hospitals proposed spending $351 million on facilities in Raleigh to serve the rising number of acute-care and psychiatric patients. The 170,000-square-foot facility sits on 27 acres and will have 45 beds dedicated to meet the state’s need for additional acute-care beds. In addition, Atrium Health and Wexford Science & Technology plan to develop a healthcare campus in Charlotte, the second largest city in the Southeast, to include space for the Wake Forest University medical school and surgical training center.

California

Due to the high cost of living and lack of affordable housing within California, the Golden State has taken multiple approaches in its effort to get a grip on high healthcare costs. California Governor Newsom issued an executive order released in January 2021 calling for the Master Plan for Aging, with efforts aimed at increasing healthcare access in lower-income communities, providing flexible housing for all ages, and increasing work and volunteer opportunities for seniors. This order will add an array of services and facilities to the market, opening the door to a flood of investors.

Los Angeles claimed the top spot for most active markets for medical office acquisitions over the last 4 quarters.

At the end of 2021, both Los Angeles and Orange County saw major sales activity within the medical office sector, and both counties have strong fundamentals that are continually attracting investors. The vacancy rate in Los Angeles fell below 10 percent for the first time since the pandemic, and Orange County’s vacancy is below 9 percent. Net absorption was positive in both markets. Los Angeles net absorption totaled more than 102,000 square feet, helping to drive strong occupancy for the year. The market in Orange County had more than 50,000 square feet of net absorption.

Furthermore, the state’s annual $308 billion budget addresses key priorities for the future of healthcare. The provisions included in the final budget will give $300 million annually for public health departments across the state, as well as an additional one-time $75 million for public health workforce development. The budget will also include:

• $1.3 billion for healthcare worker retention pay, which will provide a financial stipend for every individual working in eligible hospital settings, including physicians.
• $700 million in equity and practice transformation payments to better meet the needs of the Medi-Cal population.

The approved budget will not only decrease the rising costs of healthcare services but will bring more consumers to the sector and meet the growing demand for MOB development.

Texas

In Texas, the number of seniors 65 and older is expected to diversify, doubling from 3.9 million in 2020 to 8.3 million by 2050. As one of the largest growing states in the country, cities in the area are beginning to position themselves to meet healthcare needs and demands. The sector is currently on investors’ radar as new capital is entering the market, and more people are flocking to the state to take advantage of the low cost of living and plentiful job openings.

Houston has topped the list as the leading market for medical office construction, majorly funded by hospital systems. However, this increased development has pushed vacancy rates as the excessive new supply makes older buildings harder to backfill. Its medical office sector has gained strong momentum since 2012, delivering more than 7.1 million square feet, with average total completions exceeding 602,000 square feet every 90 days. International investors and REITs were big buyers of healthcare assets with net acquisitions registering $14 million and $43.3 million, respectively.

Austin and Dallas-Fort Worth (DFW) have seen vacancy rates decrease because of the high demand for more healthcare real estate. Northwest San Antonio has far more medical real estate than any other portion of the city; development and growth in the northcentral and northeast have increased.

Arizona

Lower tax rates, warm weather, and comprehensive healthcare services attract an overwhelming amount of retirees to the state of Arizona. According to the United States Census and migration patterns, Arizona was ranked first in the nation for relocating retirees. Home to over 1.5 million citizens 65 and older, the senior population is projected to outpace the younger generation in the next decade.  To make up for this growing demand, Governor Doug Ducey announced a $6.5 million investment to train 1,500 nursing professionals and caregivers who work in long-term care facilities.

More surgery centers, hospitals, and micro-hospitals are also being built in the West Valley, increasing demand for rehabilitation. There is a huge need for this type of bed space, especially since the COVID-19 pandemic. Recently, several rehabilitation hospitals have been announced in Avondale, and Reunion Hospitals currently have a 40-bed facility under construction in Peoria.

Submarkets like Tucson are poised for a boom in medical office building activity due to the many vacant spaces throughout the county. The further the state expands and the population spreads, the more urgent cares, surgical centers, dentists, vets, etc. will be needed. According to Revista, only nineteen metros exceeded $250 million in MOB property sales in 2021, led by Los Angeles with $1 billion, followed by Phoenix at $656 million.

The demand for healthcare services due to the pandemic, especially among seniors, has made health clinics and medical office buildings even more stable and attractive assets. The top markets within healthcare offering additional services at lower costs and increased health expenditures will see the most success as the population continues to grow. Healthcare centers will need to focus on convenience and meeting people where they live, work, and play. Multi-tenant assets that provide ample parking and offer proximity to hospital campuses, shopping centers, and transportation corridors have been increasing in value over the past two years. For many health clinics and other medical office buildings, this will shift the dynamic of the market.