It’s no secret that the work-from-home trend has substantially reduced the appeal of office buildings. This spells trouble for commercial real estate and office REITs in particular.
The trend we’ve observed for the last 5 years has been bluntly described by Elon Musk in his recent tweets and interviews.
“Commercial real estate is melting down fast. Home values next,” Musk tweeted recently.
He elaborated on it during an interview in April.
“We really haven’t seen the commercial real estate shoe drop. That’s more like an anvil, not a shoe. So the stuff we’ve seen thus far actually hasn’t even – it’s only slightly real estate portfolio degradation. But that will become a very serious thing later this year, in my view.”
If we observe stock price of some of the bigger office REITs on the market, we often see a 70% decline over a 5-year period. At the same time, several healthcare REITs have posted 20-30% increase in stock price during the same 5-year period. The message is pretty clear.
Brandywine Realty Trust (BDN) – an office REIT with a 75% 5-year decline.
Douglas Emmet Inc (DEI) – another example – 69% decline.
Meanwhile Welltower Inc (WELL), although turbulent, has seen a 30% increase.
Community Healthcare Trust Inc (CHCT) – another example of a Healthcare REIT money well invested – 20% up.
Healthcare real estate investment trusts (REITs) are an attractive asset class for investors seeking diversification and a relatively stable income stream. Healthcare REITs offer an opportunity to invest in the growing healthcare industry, which has proven to be recession-resistant and has a promising future due to the aging population and advancements in medical technology. In this blog post, we will highlight the reasons why healthcare REITs are a smart investment for CMOs and other investors looking to add this asset class to their portfolios.
Reasons why investing in healthcare REITs might be a good idea
1. Recession-resistant: Healthcare is a necessity, and people will continue to need medical services regardless of the economic climate. With an aging population, the demand for healthcare services is expected to increase, providing a steady stream of income to healthcare REITs. In addition, many healthcare REITs have long-term leases with hospitals, clinics, and senior care facilities, providing a stable income stream even during recessions.
2. Strong Market Fundamentals: In addition to being recession-resistant, healthcare REITs have strong market fundamentals. According to a report by CBRE, the healthcare real estate market has outperformed other real estate sectors in recent years, with consistent growth and low vacancy rates. The aging population and advancements in healthcare technology have led to an increased demand for healthcare services, and healthcare REITs are well-positioned to benefit from this growth.
3. Diversification: Healthcare REITs offer diversification benefits for investors. Healthcare REITs own and operate a wide range of properties, including hospitals, medical office buildings, senior living facilities, and skilled nursing facilities. This diversification can help investors reduce their portfolio risk by spreading their investments across multiple properties and types of healthcare facilities.
4. Favorable Regulatory Environment: Healthcare REITs benefit from a favorable regulatory environment. In 2018, Congress passed the REIT Modernization Act, which made it easier for REITs to make investments in healthcare facilities. Additionally, Medicare and Medicaid reimbursements provide a stable and predictable revenue stream for healthcare facilities, which benefits healthcare REITs that own these facilities.
5. Attractive Yield: Finally, healthcare REITs offer an attractive yield to investors. According to Nareit, the average dividend yield for healthcare REITs in 2020 was 4.8%, higher than the average yield for other REIT sectors. This yield can provide investors with a relatively stable income stream, making healthcare REITs an attractive income-producing asset for those looking for passive income.
In conclusion, healthcare REITs are an attractive investment for CMOs and other investors looking to diversify their portfolios with a recession-resistant asset class. With strong market fundamentals, diversification benefits, a favorable regulatory environment, and an attractive yield, healthcare REITs have a promising future. As always, investors should conduct their due diligence and consult with their financial advisor before making any investment decisions.
