If you happened to acquire a new real estate asset in late 2019, (which Recentric did), you may be wishing you could turn back the clock and change that decision. The proforma and in particular, the sensitivity matrix that you prepared to justify your acquisition did not have a check box for “Pandemic”. As a result, seeing your newly adjusted projections for 2020 and 2021 will now likely be a “brace for impact” moment.
Unless of course, you invested in health care real estate. History proved during the 2008/2009 global financial crisis that health care real estate performed the best out of all product types in commercial real estate with total returns decreasing by only 5%, vs. the second worst product type, hotels decreasing by 41%. (NAREIT)
The business of running practices
When it was clear the government would start to shut down the economy, Recentric quickly implemented a rent deferral protocol in late March and early April to handle the influx of rent deferral requests from our tenants. A standardized response was necessary to objectively respond to those tenants who were legitimately looking for relief.
This brought to light those tenants who prepared for a downturn by having existing lines of credit, a strong connection with their patients, and solid lender relationships. All of Recentric’s tenants across our portfolio are current on rent through May 2020 with the exception of one practice, who ultimately did not receive any PPP funds. These shocks to any business expose the business’ inherent flaws, and it appears that the large majority of health care practices are run well.
Debt deferment flexibility
The ability for a lender to provide relief to a property owner largely depends on their type of loan structure and source of funds. Of the total $8 trillion commercial real estate market, commercial banks represent 49% of the debt market. (CBRE, 2018). These are typically portfolio lenders who can internally defer the interest portion of the loan for 3-6 months. Regional Colorado banks have proven to be very responsive and accommodating to this crisis.
Life insurance companies which represent roughly 10% of the debt market, lend their massive cash reserves to commercial real estate to boost their bond returns. When it comes to debt deferment and the government shutdown, these types of lenders show no flexibility on the interest portion, and only consider deferring the principal portion of the loans.
Pent up demand for health care
As an unfortunate result of the government shutdown, massive amounts of patient harm are occurring due to missed routine health care. According to a recent letter sent to the White House by 600 concerned physicians, doctors have seen increases in the number of patients missing routine checkups that could detect issues like heart problems or cancer, increased substance and alcohol abuse, and greater financial instability that could lead to “poverty and financial uncertainty,” which “is closely linked to poor health.”
This demand will eventually overwhelm the health care system with patients looking to make up those missed appointments and procedures. As a result, net revenue for health care systems and practices will return to normal over the next 6-12 months.
While we are still only a few months into the government induced coma on our economy as a result of the COVID-19 global pandemic, the preliminary evidence we are seeing in the health care marketplace is that health care real estate will once again, be just fine.
Recentric Realty Capital: Recentric continues to look for development and acquisition opportunities to meet the growing demand for larger, out-patient medical facilities. This strategy allows us to take advantage of the growing need for these facilities and offer new and exciting opportunities to our current and future investors.