You Wouldn't Believe the Size of HCP Inc.'s Market Opportunity

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It's been almost a year since healthcare real estate investment trust HCP, Inc. (NYSE: HCP) spun off its skilled nursing assets and decided to focus on its core property types -- senior housing, medical offices, and life science facilities. The company's asset quality and balance sheet have improved significantly, and HCP is getting serious about pursuing future growth opportunities.

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Since it is one of the largest healthcare REITs, you might not think that HCP has tons of room for growth, but you'd be mistaken. In fact, between the opportunities currently in the market, and the wave of growth to come in the healthcare real estate industry, it's quite conceivable HCP could double or even triple in size in the not-too-distant future.

A $1.1 trillion market

Even though HCP is one of the largest players in its industry, the roughly $23 billion worth of healthcare real estate assets it owns makes up about 2% of the $1.1 trillion total value of U.S. healthcare real estate.

Even if we limit the potential market to just the company's three core property types -- senior housing, medical offices, and life science facilities -- and narrow down the options to the company's preferred locations (highly populated markets, medical offices affiliated with hospitals and healthcare systems, etc.), the opportunity is huge.

In fact, HCP estimates that in its current "investable universe" there are about

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  • $250 billion of senior housing properties
  • $360 billion of medical office properties
  • $50 billion of life science facilities

It is still the early days of REIT consolidation in healthcare real estate

I'm not saying that HCP is going to acquire over $600 billion of properties -- at least not anytime soon. However, I believe that a wave of consolidation is coming in the healthcare real estate industry, and the largest and strongest players (like HCP) should be among the main beneficiaries.

Healthcare real estate is a large and fragmented market, and is still in the early stages of REIT consolidation. Even the largest healthcare REIT has just over 3% of the U.S. market. It is estimated that about 15% of all healthcare properties are currently REIT-owned. For comparison, fellow healthcare REIT Ventas estimates that 40% to 50% of malls and 50% to 55% of hotels are REIT-owned.

$1.1 trillion could be just the beginning

A $1.1 trillion healthcare real estate market may sound massive (and it is), but it could potentially double or triple in size over the next few decades.

In a nutshell, Americans are getting older, and older Americans use healthcare facilities more often, and also spend more on their healthcare needs. In fact, the average annual healthcare expenditures of the senior citizen (65-plus) age group are more than four times the average of the rest of the population.

The next decade (2020-2030) is expected to be a particularly high-growth period for the senior citizen population in the U.S. During just these 10 years, the 75-and-older population is expected to grow by 50%, which translates to an additional 11 million people.

As a result, demand for senior housing is expected to strengthen considerably. The senior housing industry is quite small, relative to other forms of housing, with about 1.5 million units currently in the market. By 2030, it is expected to increase by roughly 600,000 units. This is a massive opportunity for growth, and the trend is expected to continue for decades beyond 2030 as well.

To sum it up, HCP currently has an investable market of just over $600 billion encompassing its three main property types. The aging population should create more demand for senior housing and medical offices, which should cause HCP's market opportunity to grow tremendously over the coming decades. If the company can successfully capitalize on its opportunities, investors who are in it for the long haul could be handsomely rewarded.

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Matthew Frankel owns shares of HCP. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.