Tuesday, 06 July 2010

Written by Marian Anthony

Aging population drives growth in healthcare REITS

As growing concerns with vacancy in retail office and industrial space weaken confidence in the commercial real estate market, healthcare realty is being identified as the next “hot ticket” for speculators.

Real Estate Investment Trusts (REITs) like HCP, Inc.—which primarily invest and manage the assets of the healthcare industry to include senior housing, medical offices, hospitals, and skilled nursing homes—are riding the wave upward while retail stores, manufacturing facilities, and office space are taking the plunge.

Many investors consider the aging population as the substantial driving force for growth in this market segment. With the recent changes in healthcare regulations, investors speculate that healthcare REITS could see significant growth as 70 million baby boomers fit the demographic profile in the next five years.

In its 2009 4th quarter report commercial leasing and management giant Cushman Wakefield, owned by the Rockefeller Group, suggested that downsizing and forced relocations accounted for fully 60 percent of the office leasing activity, while the year’s positive activity was attributed to a number of owner-user move-ins. In the same report, Cushman Wakefield noted that healthcare contributed greatly to the office space absorption.

It’s no secret that healthcare is the next sector for rapid growth in the commercial real estate market, but global political and economic concerns from foreign speculators are weighing heavily on technical corrections that veered the markets south for a near two-week straight decent.

In the last two weeks, U.S. markets extended their losses as concerns about China and the EU overshadowed modest optimism in U.S. economic reports. Mounting fears over the health of the European banking system also contributed to the perception of investors, as many pulled back and liquidated investments with the fears of instability in global financial markets. In response, Timothy Geitner, U.S. Treasury Secretary, recently landed in Europe to reassert American authority on the future of the world economy.

In an action to help failed banks, in May 2010 the Federal Deposit Insurance Corp. (FDIC) sold $233 million in Commercial Mortgage Backed Securities (CMBS) from 22 institutions to help regain confidence and stabilize the markets.

One of the biggest concerns for commercial real estate is the overall economic condition and the fears of a “double dip.” One of the primary recession indicators is the relativity to foreign trade and commerce. America stands as the biggest consumer on the global scale; with less export product and our growing dependence on imports to satisfy low-price target demand, the U.S. is currently printing less paper money. The lack of currency and crashing money supply leads to deflation, and a very possible double-dip recession, as well.

Meanwhile, a study from the Office of the Inspector General (OIG) from the FDIC determined that commercial real estate is a contributing factor in banking failure as default rates reached 11.4 percent. With the deteriorating performance in construction loans and CMBS, 565 current banks report commercial default rates of at least 10 percent of their mortgage notes.

The exceedingly high default rates in CMBS, multifamily, and construction pools weighed heavily on failing banks also because the loan pools represented a substantial share (75 percent) of the bank’s total lending.

These same defaults provide opportunity that is attracting distressed asset funds, mostly purchased with foreign capital. Online commercial auction platforms like AuctionPoint.com are expanding as the defaults increase and the local confidence deteriorates. Previously Loopnet.com was the leading online commercial real estate marketplace, but with today’s Web-based social media and sophisticated technology linking groups and business affiliates together, the new platform provides a game-changing combination that takes competitors back to the drawing board.

The bad news for brokers is that many investors are now becoming more aware of the opportunities and working directly with borrowers and note holders to hypothecate the notes in default commercial real estate loans. Companies like Strategic Asset Management that provide short sale and loan modification for commercial borrowers are not seeing the demand for brokers to act as middlemen for commercial real estate sellers and buyers, with the online marketplace providing services and information that greatly diminish the roles for brokers.

Today, most businesses are working doubly hard to keep the lights on, while searching for the winning recipe. Overall, the current state of the commercial real estate market is providing investors with a tremendous amount of opportunity as a surplus of vacant space addresses a constant and recognizable growing demand for long term care facilities.

Real estate and mortgage finance expert Marian Anthony is President of the San Diego-based Anthony Realty Group, founder of the California Default Mortgage Hotline www.CaliforniaDefault.org and author of ‘Short Sale RUSH – A How-to Guide for Nonperforming Assets.’ He may be reached online at www.ShortSaleRush.com.