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Health Care Reform Fires Up Investors

Medical office investors mobilize as landmark bill becomes law.

With health care reform enacted, developers and commercial real estate investors are responding to the new demand for medical office space, which could reach 60 million sq. ft. by some estimates. Meanwhile, many private equity real estate funds are flush with cash and under pressure to invest as deadlines loom.

The funds, which include some of the nation's biggest investors, such as insurance companies and pensions, typically have a four- or five-year window to spend stockpiled capital, and time is running out.

“They are under quite a lot of pressure to invest that money,” says Tim Friedman, head of communications at London-based data provider Preqin. The “dry powder” — committed but unspent capital available to real estate fund managers — totals $195 billion worldwide, reports Preqin.

Vintage 2006 and earlier funds possess a war chest of $23 billion, or 12% of the industry total, says Friedman. “They have four-year investment periods and they're getting toward that four-year period right now and they still haven't called up all the capital.”

Some funds are committed to specific property types, such as retail, but opportunistic funds can target assets across sectors, including medical office.

The 32 million Americans who will be covered by health insurance as the Patient Protection and Affordable Care Act takes effect over the next few years will require hospital and office space.

National Standard Finance, a public-private investment firm that is based in Atlanta, plans to spend $3 billion in 2010. About $750,000 of that is earmarked for health care-related projects, says John McCulloch, senior vice president for the health properties group.

“We're out very aggressively looking for assets,” he says. Health care reform is definitely one of the drivers, adds McCulloch. “We're looking at the development of hospitals and medical office buildings all over the country.”

Next year, he hopes to ramp up spending for health care assets to about $1 billion. With roughly a tenth of the population entering the medical system, the commercial real estate industry is not prepared to handle the influx, according to McCulloch.

National Standard is focusing on construction and acquisitions in Southern California, specifically Orange County, as well as Palm Springs and San Diego.

Over the next five years, the company plans to continue its aggressive pace, exploring deals in Arizona, Texas and Florida, and also Iowa and Oklahoma.

“You're going to see a lot of construction permits being issued in the next six to 12 months,” says McCulloch. Primary care offices and skilled nursing centers will be growth areas, he adds. Primary care physicians will act as gatekeepers, referring patients to specialists. And skilled nursing facilities will care for Medicare patients after short hospital stays.

“Uncertainty about the health care plan — whether it would pass, when it might pass, what it might contain and what it would cost — was the primary obstacle to deals in the medical office space,” says attorney Neil Shapiro, head of health care practice at New York-based Herrick, Feinstein.

“It was the removal of that uncertainty, far more than anything that the legislation contains, that will spur investment sales and leasing activity in medical offices.”

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