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Tuesday, 06/06/2023 10:43:16 AM

Tuesday, June 06, 2023 10:43:16 AM

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>>> 'Commercial Real Estate Is Melting Down Fast': Elon Musk Warns Home Prices Will Be The Next To Crash — Yet One Property Type Could Prove Resilient


Benzinga

by Jing Pan

June 5, 2023

As a serial entrepreneur who co-founded Tesla Inc., revolutionized the electric car industry and is sending rockets into space, Elon Musk isn’t known for being a real estate guru. But lately, the billionaire has been sounding the alarm for the sector.

“Commercial real estate is melting down fast,” Musk said in a recent tweet. “Home values next.”

He elaborated on the dire forecast during an interview with former Fox News personality Tucker Carlson in April.

“We really haven’t seen the commercial real estate shoe drop. That’s more like an anvil, not a shoe,” Musk said. “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.”

The Tesla CEO pointed out that the work-from-home trend has substantially reduced the use of office buildings around the world. And that does not bode well for commercial real estate.

“Almost all cities at this point have record vacancies of commercial real estate,” Musk said.

But not all commercial real estate is created equal. Here’s one type of property that could be more shockproof than others.

Medical Office Buildings

According to the latest Office National Report from commercial real estate brokerage Marcus & Millichap, medical offices face “fewer headwinds” because of the nature of their practice.

“While most medical office tenants have incorporated some degree of virtual work, hybrid interactions supplement in-person visits rather than replace,” the report said.

In other words, while the remote work trend has transformed the office property landscape, medical office buildings continue to serve a vital purpose because of the need for in-person visits.

Another compelling factor contributing to the resilience of medical offices is America’s aging population. Approximately 10,000 baby boomers reach age 65 in the U.S. every day, and the demand for medical services tends to increase as people grow older.

The report said that this demographic trend could be a backstop for long-term space demand.

To see how resilient medical office buildings are, look at Riverside-San Bernardino. The report highlighted that this region is expected to “maintain the lowest traditional office vacancy rate among major U.S. markets in 2023,” attributed in part to the presence of “strong medical office fundamentals.”

“Medical office vacancy here was at 6.8% in March,” the report said.

Getting A Piece Of The Action

Medical office buildings can be a significant investment, often requiring substantial capital to acquire. The good news? You don’t necessarily have to purchase an entire building. Nowadays, there are multiple avenues for investors to participate.

For instance, some publicly traded real estate investment trusts (REITs) own medical office properties. Investors can gain exposure to the segment by purchasing shares of these REITs.

Here’s a look at two that Wall Street finds particularly attractive.

Healthcare Realty Trust Inc. (NYSE: HR): Healthcare Realty Trust is a REIT that specializes in medical office buildings and outpatient facilities. The company’s portfolio consists of 715 properties in 35 states totaling approximately 41.8 million square feet.

Notably, 72% of the properties are on or adjacent to hospital campuses. The REIT pays quarterly dividends of 31 cents per share, translating to an annual yield of 6.7%. Barclays analyst Steve Valiquette has an Overweight rating on Healthcare Realty Trust and a price target of $25, implying a potential upside of 34%.

Ventas Inc. (NYSE: VTR): Ventas is a healthcare REIT with a broader focus. With more than 1,200 properties in the U.S., Canada and the U.K., the company’s portfolio spans senior living communities, medical offices and outpatient facilities and hospitals as well as life science, research and innovation properties. The stock offers an annual dividend yield of 4.1%. Mizuho analyst Vikram Malhotra has a Buy rating on Ventas and a price target of $53. Since shares trade at $43.70 today, the price target implies a potential upside of 21%.

Income investors are drawn to REITs because they are some of the higher-yielding names in the stock market. But remember, publicly traded REITs — including those that focus on medical properties — are still subject to the stock market’s ups and downs. If you don’t like the volatility associated with publicly traded REITs, note that there are also private market options that allow retail investors to add medical office buildings to their portfolios.

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