Some types of healthcare real estate -- such as senior housing -- were hard-hit by the COVID-19 pandemic. But medical office properties were not. Not only are medical office properties extremely resilient in recessions (and pandemics), but demand for these types of properties is likely to grow dramatically in the coming decades.
In this Dec. 1 Fool Live video clip, two experts from The Motley Fool's Millionacres real estate subsidiary, Matt Frankel, CFP, and Deidre Woollard, discuss why medical office real estate investment trusts (REITs) have held up so well and why the future could be very bright.
Matthew Frankel: Right, and you mentioned medical office and I'm glad you did because that's really been a saving grace for some of these healthcare REITs this year. If you look at some of the numbers of medical office performance, you would have no idea that anything was out of the ordinary in the economy. Ventas (NYSE:VTR) is one of the biggest healthcare REITs in the world. Ticker symbol is VTR. Their medical office rent collection was at 99 percent in the third quarter. That's pretty much a normal level. Physicians Realty Trust (NYSE:DOC) was over 99 percent when you consider the tiny amount that they agreed to defer earlier. Medical offices have generally held up really, really well. Not only are they essential businesses in most markets, even in the height of the pandemic in the worst affected parts of the US, people still needed to be able to see the doctor if they had to. It's considered generally an essential business, and actually got somewhat of a tailwind this year, as non-essential procedures were prohibited in many hospitals to prevent them from being overwhelmed. There's already been a gradual shift toward outpatient care as medical capabilities have increased in recent years. But the pandemic seems to have accelerated this because they've been encouraging non-essential procedures to not happen in hospitals.
Deidre Woollard: Well, I think that's a really interesting trend, because you are right, that trend has been going on for the past few years, and I think that this maybe one of the things that the pandemic accelerates, is that feeling more comfortable in a smaller space versus going to a large hospital, it's usually tends to be more convenient and more near your house or things like that. I think that's something that was happening before that. The other thing, what you and I have talked about before is that, with medical office, there just isn't that much of it that's held by REITs right now. So there really is a potential for so much of that to grow and for REITs to take a larger share there. We've talked about Physicians Realty Trust before, and the potential that they see just to keep acquiring businesses, because a lot of medical offices are owned either by the physicians themselves, like in small offices, or by other places that may not want to continue to own medical offices.
Frankel: You mentioned that. The figure is about 15 percent, if you look at the entire medical real estate market, it's about $1.2 trillion in size. Only about 15 percent of that is currently REIT-owned, and with medical offices, it's even lower. Like you mentioned, they're owned a lot by the physicians that operate them, by the hospital systems that they're affiliated with. By selling these properties to REITs, the owners can really free up that capital to expand their businesses, to fortify their balance sheets. It's a really capital-intensive business to own real estate if that's not your primary businesses.
Frankel: The healthcare real estate market, especially medical offices, are just ready for REIT consolidation. I mentioned 15 percent, just to put that in perspective, hotels and shopping malls are 40-60 percent REIT owned depending on what study you're looking at. There's a lot of room for REIT consolidation in the healthcare space, just among the existing inventory. Forget about the long tail growth trends that we mentioned.