The Enormous Opportunity for Owner-Occupied Healthcare Facilities

November 7, 2018

It’s no secret that healthcare in the United States is big business. In 2017, Americans spent nearly $3.5 trillion on their healthcare, and the U.S. Centers for Medicare and Medicaid Services is estimating a 5.3% increase this year. By 2026, that spending is projected to reach $5.7 trillion.

That growth has a whole range of implications, but today we’re going to narrow in on what it means for the real estate market – more specifically, the market for owner-occupied healthcare facilities, and the ways that they can be a perfect fit for SBA 504 financing.

Defining “Owner-Occupied Healthcare”

There’s a wide range of facilities that could fall into this definition, so let’s look at a few specific examples.

At the smaller end of the spectrum, you have individual practitioners who need office space: a single medical doctor, dentist, optometrist, physical therapist, counsellor or other healthcare professional who sees patients and provides treatments in their facility.

The next stage would be medical and other healthcare groups: groups of providers in the same classes who have joined together and are looking for larger spaces with more or less the same needs.

After this, there’s a whole different class of space with more specialized, often larger needs. These would be facilities like surgery centers, pharmacies, nursing homes and rehabilitation facilities, hospices and urgent care facilities, and even smaller community hospitals. Each of these facilities has unique needs in terms of real estate, but they can all fall under the umbrella of “owner-occupied healthcare facilities,” and they can often all be a great fit for SBA 504 financing.

Demand Outstripping Supply

There’s plenty of data to suggest that the demand for these facilities is hot, and growing. A study in September from Transwestern estimates that total demand for medical office space in 2019 will be between 150 million and 225 million square feet in 2019, somewhere between 1.3x and 2x the space available right now.

This summer, The Wall Street Journal reported a new high watermark for medical office buildings, set by the over $400 million acquisition of a 500,000-square-foot building in Houston. Add those numbers to the expected growth in overall healthcare spending, and it’s clear that this is a sector worth focusing on for any real estate professional.

Skilled Nursing and Assisted Living facilities are also seeing positive trends.  Over the past 10 years, the average daily rate at skilled nursing facilities has climbed by at least 2.5% per year, while sales of majority skilled nursing assets grew 17% during 2017.  The average price per bed in those sales was over $81,000, valuing a 100-bed facility at over $8-million.

Last year, the Assisted Living industry saw a construction boom, adding a decade-high 18,500 units.  Despite this boom of inventory reaching the market, occupancy rates in the sector remained high at 88.6%.

Well-Qualified Buyers

It’s not a surprise that certain segments of this market produce facility owners who should have no trouble qualifying for a range of financing products, including SBA 504 loans.

The average physician salary in 2018 was $299,000, and many specialties outperform the average. Plastic surgeons and orthopedists average close to $500,000 per year, and even the lowest-paid specialties average over $200,000. Additionally, physicians in private practices tend to do about 20% better than employed physicians.

Physicians aren’t the only qualified buyers in this segment. Dentists average over $153,000 in annual salaries, and like physicians, those in private practices tend to do better. The average Ambulatory Surgery Center netted more than $8.8 million in 2016, with a $2.8 million profit. Before they stopped reporting, a national pharmacy organization admitted that pharmacies take in more than a 23% profit margin on what was an average $3.8 million in annual sales.

Senior housing is seeing significant, consistent revenue as well.  With an average daily rate for skilled nursing of $311 per bed, 100-bed facility would be bringing in $31,100 per day, or over $11.3-million per year.

All of this bring up two critical points: first, my mother was right and I should have gone to medical school; and second, if you’re looking for small business owners who could easily qualify for a SBA 504 loan, the private healthcare sector is a great place to start.

Making the Case for Building Ownership

Owning your own building has a range of benefits for owner-occupied healthcare facilities. First, it provides insulation from constantly rising rental rates, particularly when combined with fixed-rate SBA 504 financing.

Second, ownership provides a maximum flexibility. There’s no need to balance the needs of your facility with the often-changing needs of a restrictive landlord.

Additionally, in the right market, it can be a solid investment. Many real estate professionals recommend purchasing vs. leasing for healthcare practitioners who plan to be practicing in their location for 10 years or more, during which the mortgage will typically be paid off in full. And medical office space, skilled nursing and assisted living facilities can be seen as very secure asset classes.

Finally, building ownership can provide additional value or ongoing income when it comes time to sell a practice or facility. It’s not uncommon for the owner of a private medical or dental practice to sell their practice to a younger associate, and then continue leasing the building, which provides ongoing income. The same scenario can play out for independent owners of skilled nursing and assisted living facilities, who may sell to larger corporations.

Picking The Right Spot

When it comes to owner-occupied healthcare, not all markets are created equal.  A study released earlier this year analyzed the entire country, and picked the country’s hottest 10 markets for senior housing, based on the number of Independent Living, Assisted Living and Skilled Nursing facilities currently under construction, as well as their average occupancy, and the population growth in the 65+ sector.

While this data is specific to senior housing, it has implications for the entire owner-occupied healthcare real estate market, since seniors spend about 3x the amount on healthcare as working individuals.

Top 10 Seniors Housing Construction Markets 1Q18[1]

Chart: Top 10 Seniors Housing Construction Markets 1Q18

What it Looks Like in the Real World

In just the last few months, Liberty SBF had the opportunity to help two small business owners take advantage the opportunity posed by owner-occupied healthcare facilities.

First, we provided $12.9 million in financing for the acquisition of a skilled nursing home in Tucson, AZ. We provided both the $8-million SBA 504 first loan, as well as a $4.9 million interim loan to allow the transaction to proceed while the CDC portion of the SBA 504 loan is being completed. The owners have 20+ years of experience in long term facilities, and a portfolio with a total value of $97.1-million.

Even more recently, we provided $1.2 million in funding for a medical office building just outside Miami, FL. The facility provides prescribed pediatric extended care for children with medically complex conditions. Liberty was able to provide both the $650K first mortgage, and the $520k interim second.

In both cases, we were thrilled to be able to help small business owners acquire properties that will help insulate them from rents that are likely to steeply increase, and let them take advantage of future increased property valuations.

Making the Right Connections

One of the biggest obstacles preventing many healthcare professionals from purchasing their own facilities is that they simply don’t know that it’s a realistic option. If I were a broker looking to earn a grateful client, I might start by making an appointment for an annual checkup, teeth cleaning, eye exam or a bit of physical therapy with a provider who’s leasing space. Then, during the appointment, I might ask my provider if they have ever thought about owning their own space.

Or, invite the owner of your local skilled nursing or assisted living facility out for lunch.

From there, a few words about the SBA 504 program’s low down payments, 25-year terms, financing up to and above $15 million, and fixed rates might be enough to light a spark and win you a new client.

And remember, if you ever need any backup, our entire team of SBA 504 financing experts is ready to help.

 

[1] Marcus & Millichap Research Services, National Report, Seniors Housing Research First Half 2018