State of the Healthcare Market 1Q-2023

Northern NJ

3,147

Medical Buildings

50,804,977 SF

RBA

$22.10 PSF

Base Rent

Bergen County

442

Medical Buildings

7,174,944 SF

RBA

$25.41 PSF

Base Rent

TOP SALES & LEASES

SALES

26,150 SF | $4,200,000

330 Changebridge Road, Pine Brook, NJ

Buyer: National Retail Properties

Seller: South Salem Street Associates

6,270 SF | $1,350,000

37 E. Willow Street, Millburn, NJ

Buyer: Somma Associates, LLC

Seller: Michael Adler

LEASES

22,014 SF | 500 N Franklin Turnpike, Ramsey, NJ

16,000 SF | 515 Union Boulevard, Totowa, NJ

12,954 SF | 155 Passaic Avenue, Fairfield, NJ*

*Team Lizzack-Horning Transaction

As 2022 wound down, investors predicted that while economic conditions remained turbulent, the healthcare and life sciences industry would see more dealmaking in 2023. An early 2023 report said 60% of healthcare and life sciences investors intended to engage in M&A activity. Other experts predict the M&A volume will increase throughout 2023, although continued high interest rates and global economic instability are influencing investors to proceed with caution.

Attendees at the recent McDermott Will & Emery Healthcare Private Equity Miami Conference shared the following insights and predictions:

Volume will increase in the second half of 2023. Current high-interest rates and valuation misalignment between buyers and sellers may slow deals in Q1 and Q2. This slower pace will increase interest in more creative financing structures like co-investments, minority recapitalizations, a return to earnouts, and seller financing.
The specialty outlook is good. Cardiology, GI, oncology, ortho/PT and other specialty physician practices remain popular. One reason? Evolving — and accessible — technology has reduced risk and improved patient outcomes. Technology has enabled physicians to perform 50% of cardiac treatments in outpatient settings, for example.

Specialty practices like these also generate opportunities to aggregate huge volumes of clinical data which biotechnology and pharmaceutical companies are monetizing as they develop new treatments.

More risk — more reward. Value-based care continues to drive financial results. Nearly 50% (49.9%) of the eligible Medicare population is currently enrolled in Medicare Advantage plans. Last year, the Centers for Medicare & Medicaid Services (CMS) said it was committed to enrolling 100% of eligible beneficiaries enrolled in its value-based care program by 2030. At-risk arrangements continue to move forward, with healthcare leaders acknowledging that by taking on full risk, they gain the freedom to do what patients need.

Smaller for-profit companies and larger health systems have also asked for full risk. The result? More robust workflows that enable providers to more effectively manage patients, resulting in fewer hospital visits, acute episodes, or readmissions. Another result? This full-risk arrangement reduces the costs shared amongst companies, payors, and practices — and increases patient satisfaction.

Digital health growth has slowed since its initial explosive momentum, accelerated by the pandemic. But rising costs of face-to-face healthcare, ongoing staffing shortages, and the ability of telemedicine to reach people who otherwise have limited access to the care they need has secured analytics, health tech and telehealth companies’ roles as attractive assets this year.

Behavioral health continues to become specialized. With digital health providers expanding their scope of care to include behavioral health, experts predict this currently fragmented market — comprised of informal private practices — is ripe for consolidation. Tele-mental health providers may increasingly focus on acquiring assets in condition-specific behavioral sciences like ADHD, PTSD, and OCD as well as group therapy practices.

Investors have suggested there are several main obstacles to M&As: continued inflation and additional higher interest rates; strong competition for tempting targets; and anticipated impact on the economy.

But a PwC analysis counters, suggesting that increasing transaction volumes and players embracing value-based care — coupled with large levels of corporate cash and private equity dry powder — are leading to continued expansion for deal volumes in 2023. Deal volume will remain robust and resilient despite headwinds.

Many CRE professionals believe the data supports the reputation for resilience that the healthcare and life sciences industry has established. Other reports say competition from generics and biosimilars, a growing gene therapy pipeline, the loss of patient exclusivity, increased patient awareness, expectations and requirements, and breakthroughs in digital technologies will increase M&A activity this year, too.