SANTA ANA, Calif., April 3, 2008 /PRNewswire-FirstCall/ -- Grubb & Ellis Company (NYSE: GBE), a leading real estate services and investment firm, announced in a report released today that aging baby boomers and their increasing demand for medical services will fuel demand for healthcare properties over the next decade. As a result, medical properties are positioned to outperform other property types over the next 10 years, according to Robert Bach, Grubb & Ellis' Chief Economist and author of the report.
Medical office space is already outpacing traditional office space as measured by asking rental rates. From 2000 to 2007, asking rental rates for medical office space grew an average of 2.8 percent per year on average, while rents for traditional office product grew an average of 1.3 percent, according to Grubb & Ellis.
The growing demand for medical services has kept healthcare construction booming. Norcross, Ga.-based Reed Construction Data reports that monthly spending on healthcare construction is 20 percent higher than a year ago.
For 2008, Reed projects that healthcare construction will jump another 14 percent. Four states accounted for one-third of healthcare starts in 2007: California, Florida, Texas and Illinois. By decade's end, construction could reach $60.1 billion, according to FMI Corp., a management consulting and investment banking firm based in Raleigh, N.C.
There are multiple drivers fueling demand for healthcare properties. Total public and private healthcare expenditures in the U.S. are expected to grow at an average annual rate of 6.7 percent from 2007 to 2017, according to a report by the Centers for Medicare & Medicaid Services. They will comprise 19.5 percent of GDP in 2017, up from 16.3 percent in 2007.
The 65 and over age group is projected to grow 36 percent between 2010 and 2020 compared with 9 percent for the general population, according to the U.S. Census Bureau. Members of this age group are more frequent users of medical services, according to the National Ambulatory Medical Care Survey, which gathers information about the healthcare provided by office-based physicians.
Individuals 65 to 74 made an average of 6.5 visits per capita physicians' offices in 2005 compared with 3.3 visits per capita for all age groups, the survey said. The 75 and over age group made an average of 7.7 visits per capita. Meanwhile, the average number of visits per capita for all age groups increased from 2.7 in 1985 to 3.3 in 2005, suggesting a rising propensity among all consumers in general to access healthcare services.
According to data from the American Hospital Association, the number of hospital beds in the U.S. fell from just over 1 million in 1982 to 808,000 in 2004, while the number of beds per 1000 population declined from 4.37 to 2.75, an indication that consumers are increasingly accessing healthcare services in outpatient settings such as medical office buildings and freestanding clinics.
Venture capital spending for healthcare-related products and services hit an all-time peak in 2007, both in absolute terms at $9.5 billion and as a share of total venture capital spending at 32 percent, according to the PricewaterhouseCoopers, National Venture Capital Association: MoneyTree Report.
These factors will propel growth of health-related occupations at about twice the rate of general employment growth over the next decade, and in turn, generate tenant and owner-user demand for medical office space and other types of healthcare properties.
The capital market fundamentals for medical office space were very favorable until the global credit markets seized up in August 2007. However, despite the turmoil in the credit markets, the dollar volume of investment transactions for medical office space hit a new peak of $4.7 billion in 2007, according to Real Capital Analytics.
Capitalization rates declined from 9.7 percent in 2002 to 7.0 percent in 2007, indicating that investors have been willing to pay more per dollar of net operating income generated in the first year of ownership. This has been due to the favorable outlook for medical office properties as well as very aggressive credit markets prior to August and to a surplus of equity allocated to real estate investments.
However, cap rates are expected to increase and investment transactions decrease in the short term because lenders and investors have become more risk-averse since the deterioration of the credit markets. This is true not only for all types of commercial real estate investment, but for investment and credit markets across the broad spectrum of economic sectors in all corners of the globe, the Grubb & Ellis report said.
Nevertheless, medical office buildings and other healthcare properties are expected to weather soft economic conditions better than other property types due to the recession-resistant, non-cyclical nature of demand for healthcare services among U.S. consumers.
"The looming economic slowdown is likely to make the healthcare property sector, with its non-cyclical growth profile; look relatively more attractive compared to other property sectors, all of which will be affected to differing degrees by the flattening economy," Bach said. The full report can be found in the research section of the Grubb & Ellis Website, http://www.grubb-ellis.com.
About Grubb & Ellis
Grubb & Ellis Company (NYSE: GBE) is one of the largest and most respected commercial real estate services and investment companies. With more than 130 owned and affiliate offices worldwide, Grubb & Ellis offers property owners, corporate occupants and investors comprehensive integrated real estate solutions, including transaction, management, consulting and investment advisory services supported by proprietary market research and extensive local market expertise.
Grubb & Ellis and its subsidiaries are leading sponsors of real estate investment programs that provide individuals and institutions the opportunity to invest in a broad range of real estate investment vehicles, including tax-deferred 1031 tenant-in-common (TIC) exchanges, public non-traded real estate investment trusts (REITs) and real estate investment funds. As of December 31, 2007, nearly $3 billion in investor equity has been raised for these investment programs. The company and its subsidiaries currently manage a growing portfolio of more than 216 million square feet of real estate. In 2007, Grubb & Ellis was selected from among 15,000 vendors as Microsoft Corporation's Vendor of the Year. For more information regarding Grubb & Ellis Company, please visit http://www.grubb-ellis.com.
Except for historical information, statements included in this announcement may constitute forward-looking statements regarding, among other things, future revenue growth, market trends, new business opportunities and investment programs, synergies resulting from the merger of Grubb & Ellis Company and NNN Realty Advisors, new hires, results of operations, changes in expense levels and profitability and effects on the Company of changes in the real estate markets. These statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results and performance in future periods to be materially different from any future results or performance suggested by these statements. Such factors which could adversely affect the Company's ability to obtain these results include, among other things: (i) the volume of sales and leasing transactions and prices for real estate in the real estate markets generally; (ii) a general or regional economic downturn that could create a recession in the real estate markets; (iii) the Company's debt level and its ability to make interest and principal payments; (iv) an increase in expenses related to new initiatives, investments in people, technology and service improvements; (v) the success of current and new investment programs; (vi) the success of new initiatives and investments; (vii) the inability to attain expected levels of expense synergies resulting from the merger of Grubb & Ellis Company and NNN Realty Advisors; and (viii) other factors described in the definitive joint proxy/prospectus filed with the Securities and Exchange Commission on November 5, 2007 and the Company's annual report on Form 10-K for the fiscal year ending December 31, 2007, filed with the SEC.
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