REITs Pour Capital Into Healthcare Real Estate With ‘Gray Tsunami’ Approaching

Net Income Growth of 7.6% Lured Capital Into the Sector

Healthcare real estate, a relatively niche market within the larger real estate industry that includes hospitals, assisted living facilities and rehabilitation centers, can often blend elements from familiar real estate sectors like office, multifamily and retail, offering a unique investment subtype.

The sector is increasingly attracting REITs’ attention, driven by the growing demand for medical services as the baby boomer generation ages. By 2030, the U.S. Census Bureau predicts that 73 million baby boomers will be over 65, an event called the “gray tsunami,” with 10,000 boomers reaching this milestone daily. Additionally, longer life spans and historically low birth rates are expected to shift the age balance, with older adults projected to outnumber those under 18 by 2034 for the first time in U.S. history.

In the fourth quarter of 2023, REITs shifted their focus toward segments with strong income growth, particularly in healthcare properties. The sector saw a 7.6% increase in same-store net operating income growth from the fourth quarter of 2022, attracting almost $2 billion in net healthcare property acquisitions in the year’s final quarter.

Conversely, sectors like office, hospitality and multifamily experienced weaker income growth and saw decreased net acquisition activity as investors shifted away from assets with relative underperformance.

Welltower is one company capitalizing on the growing trend. The publicly traded REIT specializes in the healthcare sector and invests in senior housing, outpatient medical properties and long-term care facilities.

In late 2023, the company completed $3 billion in pro rata gross investments, including $2.8 billion in acquisitions and loan funding and $277 million in development funding. One of its notable fourth-quarter transactions was its acquisition of the Balfour at Littleton, a nearly fully occupied assisted living facility in Littleton, Colorado. Developed in 2018, the 86-unit, four-star facility was purchased for $31.5 million, or $366,280 per unit.

REITs hold a significant position in the roughly $20 trillion U.S. commercial real estate industry, representing an estimated 20% of the market. Publicly traded REITs account for about half of this share, according to industry association Nareit. Over the past decade, these entities have expanded their presence, especially in sectors such as freestanding retail buildings, industrial properties and now healthcare.

REITs, which own, operate or finance income-generating real estate, extract revenue mainly through leasing space and collecting rent. Since they are required to distribute at least 90% of their taxable income to shareholders as dividends, they focus on income growth and preservation.

As the demand for healthcare services escalates in the coming decades, this vital asset class is expected to play an increasingly prominent role for these firms and the industry at large.

REITs Pour Capital Into Healthcare Real Estate With ‘Gray Tsunami’ Approaching
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