By Cory Atkins, Atkins Companies
So far in 2024, northern New Jersey’s medical office market has largely reflected the trends seen across the nation’s commercial real estate industry.
Elevated interest rates, macroeconomic pressures and general market uncertainty have slowed deal flow. For investors, penciling deals in virtually any asset class, including healthcare, can be a tough task in what remains a difficult market.
Beyond the overall challenges facing the commercial real estate market, healthcare systems have reevaluated their plans for strategic expansion and consolidation due to elevated interest rates, increased labor costs, staffing shortages, and downward pressure on public and private insurance reimbursements.
However, we do see encouraging signs that the healthcare real estate market is loosening. The promise of achieving what appears to be a soft landing and several pending interest rate cuts in 2024 are signaling the possibility of a less restrictive lending environment to come as the year progresses. In addition, significant dry powder remains on the sidelines waiting to be deployed into both real estate and healthcare investments. The northern New Jersey medical office market’s underlying fundamentals also present reasons for optimism and position it to rebound more quickly than other markets in the nation.
As we near the end of Q1, now is a great time for healthcare real estate investors to take stock of their current positions and prepare for tomorrow’s market conditions. For instance, capital and operational improvements made today will position buildings for long-term success ahead of the expected bounceback of the market. As healthcare systems look to accelerate their plans of consolidation and expansion, newly renovated medical office spaces, surgical centers and outpatient facilities will become exceedingly valuable and present opportunities to yield high returns.
Real estate inventors can also look to leverage the relationships they’ve established with healthcare systems to negotiate sale-leaseback deals. These arrangements can help systems free up capital to redeploy within other areas of their businesses to improve their delivery of care and power continued growth.
The current market conditions present opportunities for creative investors to grow their portfolios. The increase in remote work has reduced demand for office space and created many underperforming professional office buildings, and some of these spaces are ideally suited for repositioning and conversion into healthcare destinations. With costs of development as high as they are and the long lead time needed for ground-up development, adaptive reuse is becoming an increasingly sensible strategy for healthcare real estate investors.
Cory Atkins is a principal at the Atkins Cos.