Financing Hurdles Slow Healthcare CRE, Even As Bay Area Demand Builds

Healthcare real estate is facing one of the toughest lending environments in years. Rising borrowing costs and a widening disconnect between what owners expect and what investors can underwrite have pushed the sector into a slower, more cautious phase. 

Deals are taking longer to pencil, financing is harder to line up, and many properties purchased in the low-rate era are struggling to support today’s pricing assumptions. 

In the Bay Area, aging medical inventory presents a host of challenges, from a lack of Americans with Disabilities Act compliance to seismic requirements to tenant improvements that run upward of $250 per SF, Tri Commercial Executive Vice President Edward Del Beccaro said at Bisnow's Northern California Healthcare Real Estate Conference.

The region did not rank among the top 25 metro areas for trailing 12-month net absorption, according to a PwC report. 

But it isn't all doom and gloom. Some capital sources are preparing for a reentry, hospital systems are planning new facilities across the Bay Area, and users are redirecting demand toward more modern, purpose-built outpatient settings.

Long-term demographic pressure, especially in Bay Area submarkets like Marin County, where there is a substantial population over 65, will fuel an increase in demand for medical services. All of this could position the sector for a rebound once the cost of capital begins to ease.

In the current market, far fewer institutions are willing to finance development or acquisitions, and only the most heavily vetted deals make it through. Relationship lending has become essential as even top brokerage shops struggle to pull term sheets. 

“We used one of the big brokerage houses to go out and look for term sheets. They actually came up empty-handed, and it was a relationship lender that came to the table with a term sheet,” Meridian Chief Financial Officer John Pollock said at the conference, held Nov. 20 at the Grand Hyatt San Francisco.

Banks have grown increasingly risk-averse, calling for tighter underwriting and stricter debt service coverage ratios while offering shorter interest-only periods, wider spreads and more conservative leverage. And it has become difficult for healthcare developers to find the right lending partners to begin with.

“We’re in an industry on the bank side with a fairly shrinking group of bankers that have institutional knowledge and long-term expertise,” Columbia Bank Healthcare Senior Vice President and Managing Director Dave Erickson said.

Even as capital waits on the sidelines, the bigger drag on healthcare deal flow is the widening gap between how buyers and sellers view asset values. Owners who bought or refinanced during the zero-rate era are still anchored to those peak valuations, while today’s investors are pricing assets against a very different economic backdrop. 

“Buyers are forward-looking and sellers are backwards-looking right in terms of cap rate,” Anchor Health Properties Investment Manager Andrew Antognoli said.

That disconnect is amplified by the cap rate reset moving through the market. 

“Cap rates are relatively high right now, anywhere from six and a half to seven, even for medical, depending upon quality. And interest rates are high,” Del Beccaro said. 

Many sellers remain reluctant to adjust from the pricing they achieved just a few years ago. 

“A lot of portfolios still are not in good shape because they were buying when rates were zero, money was free, and bought at very aggressive cap rates,” Healthcare One Properties managing partner David Lynn said.

The result is stalled pipelines, repeated retrades and users delaying major decisions.

“We’re in the ‘great pause’. First, the pandemic, then the last two years because of high interest rates and high construction costs, people are just delaying decisions. And if the renewal rates are less than replacement value, you can’t do too much,” Del Beccaro said.

Another major constraint is the simple lack of available product. Institutional investors who rushed into the sector in 2022 are still working through value-add or repositioning strategies, slowing the release of new properties into the market. The deals that are trading today tend to be on the smaller side. 

“I did a survey yesterday of Contra Costa, Alameda, East Bay, and there was about 20 transactions, and only a couple were above 10 million. Most were below 7 million, and a given percentage of those were SBA loans,” Del Beccaro said.

Institutional capital, however, is gearing up. 

“We have almost three-quarters of a billion in equity commitment. Our old equity partners are coming back into the fold,” Antognoli said.

Anticipating the specialized needs of an aging population, several hospital systems in the Bay Area are building new hospitals from the ground up. Sutter Health is set for a $1B expansion in Emeryville. Good Samaritan Hospital broke ground on a $1.3B expansion in San Jose. 

UCSF has a $4.3B project in the works, and Kaiser Permanente has a new project set to open in 2029. Those projects will activate the surrounding real estate, generating opportunities to redevelop existing property or build new inventory nearby. 

With care delivery moving further afield from hospital campus, need has shifted away from traditional medical office buildings to more specialized healthcare assets.

“The users are driving the activity. We’re seeing more end users, more hospital JVs putting their capital into the ASC space or micro-hospital space,” Bayside Realty Partners President and CEO Trask Leonard said.

The shift is also partly a response to the aging MOB stock in many markets. 

“A lot of hospital systems want to be in bigger, nicer, newer, ADA-compliant buildings, but there’s a whole tranche of MOBs in the Bay Area that are not that, that are smaller, that have serious deficiencies, and some of those are struggling,” Ericksen said.

Investors are responding by targeting purpose-built facilities and properties suited for conversion or reuse. The tactic capitalizes on demographic growth, outpatient expansion, and health systems’ need for modern, flexible space. Markets with growing populations near major healthcare providers are poised to receive a new wave of capital deployment. 

That growth potential has led to a mood shift in private equity, where real estate has been on the back burner. Firms are looking to diversify and rebalance their portfolios.

“It's been like a funeral for the last three, four years, and suddenly people wanted to talk to me for a change. Usually, I'm chasing them like they've got a slab of bacon on their back and they're running from me, but now they're coming to me,” Lynn said.

Looking forward, healthcare, with its reliable demand and relative stability, has the potential to become a highly attractive asset class. 

“As interest rates come down in 2026 and 2027, activity slows to a certain extent. Medical, I think, will be one of the preferred products, especially if there’s potential to raise the rents or if there’s a quality tenant,” Del Beccaro said.