Why Medical Office Could Be The Safest Asset Class During A Recession

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The potential of a looming economic downturn has investors looking for safe places to put their money, and one top investment manager says medical office could be the best bet.

LaSalle Investment Management Head of U.S. Healthcare Real Estate Steve Bolen, speaking at Bisnow’s National Healthcare Mid-Atlantic event last week at the Washington Marriott Georgetown, said the two safest asset classes in commercial real estate are multifamily and medical office.

“Apartment owners are able to maintain occupancy during a downturn by lowering rents, and they have the flexibility to bring them back up with the economy improves,” Bolen said.

Medical office space has the benefit of being occupied by an industry, healthcare, that typically does not suffer the same job loss as other sectors during a downturn. During the Great Recession, Bolen said the overall U.S. employment base was shrinking by more than 6%, but the healthcare employment base was still able to grow by more than 2%.

“There is no better sector of our U.S. economy in terms of job growth during downturns in the economy than healthcare,” Bolen said. “Astute institutional investors have come over to medical office and view medical office as a key component of a well-diversified commercial real estate portfolio.”

Another benefit of medical office, Bolen said, is tenant retention. LaSalle has made about $2.5B of medical office investments, he said, and the overall retention rate for its medical office tenants is in the mid-80% range. In standard commercial office space, he said, retention is in the 60% to 70% range.

“So you’ve got excellent employment growth during downturns in the economy and very sticky tenants,” Bolen said. “Medical office has a lot of attributes investors view very favorably when investing for defense.”

The main challenge in investing in medical office today, Bolen said, is that so many investors are looking to put money into the asset class that there is not enough supply to satisfy the demand. The solution for this, he said, is to look in secondary and tertiary markets that investors might overlook. Medical office investors do not need to stick to the top 25 largest metropolitan areas as investors of commercial office do, he said, and they can instead find quality hospitals that create demand for medical office space in smaller markets.

“There’s just not enough to buy that’s good quality for the amount of capital that is seeking a home in this space,” Bolen said. “So you have to go where the deals are. You have to align yourselves with hospital systems in secondary and tertiary markets.”

Demand for medical office space is booming in part because health systems are moving many services away from traditional hospital campuses and into outpatient facilities. Over the last two years, the revenues that leading hospital systems make outside of the hospital have begun to equal the money they’re making inside the hospital, said Dr. Sunil Budhrani, CEO of Innovation Health, a partnership between Inova and Aetna.

“The world outside the walls of the hospital has become very important to us,” Budhrani said. “In some markets, you’ll see a reshaping toward ambulatory, outpatient [facilities] … We’re going to reshape how we’re delivering healthcare and how the hospital plays into that space.”

 

Source: Bisnow

CBRE Completes Sale Of A 23-Medical Building Portfolio Totaling $90M Across Four States

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CBRE just announced  the closing of 23 medical buildings through three separate transactions totaling approximately $90 million.

The deals, sold to separate buyers over the last week, totaled over 300,000 square feet across four states. Properties include the Greenleaf Center Medical Portfolio in the Chicago Metropolitan Area, the Dermatology Solutions Group Portfolio in multiple markets in Florida and Alabama, and 2061 Peachtree located in Atlanta, Georgia. The seller’s exclusive advisors for these deals were Lee Asher, Chris Bodnar, Sabrina Solomiany, Shane Seitz, and Ryan Lindsley of CBRE U.S. Healthcare Capital Markets.

The Greenleaf Center Portfolio consists of 13 medical office buildings clustered around a high traffic intersection within the Chicago Metropolitan area. The buildings total 197,385 rentable square feet and were 93% leased at the time of sale, with 44% of the rentable space leased to investment grade-credit and health system tenants.

The Dermatology Solutions Group Portfolio consists of eight dermatology facilities totaling 51,505 rentable square feet located in Florida and Alabama. The properties were 100% leased to Dermatology Solutions Group with a new 10-year lease which was signed by the physician practice at closing.

2061 Peachtree is a five-story class A medical office building located in the highly affluent South Buckhead area of Atlanta, Georgia. The 47,936 rentable square foot building was built in 2013 and is adjacent to Piedmont Atlanta Hospital. At the time of sale, the property was 100% leased to a diverse set of tenants, including Georgia Hand, Shoulder & Elbow (GHSE), the largest hand and upper extremity practice in Georgia.

“We continue to see very strong interest in the market for healthcare real estate assets, and investors have allocated a substantial amount of capital to the sector this year. Consistent with previous years, pricing and demand for healthcare investment properties continues to be strong with steady cap rates year-over-year,” said Lee Asher, Vice Chairman at CBRE.

CBRE Healthcare Capital Markets (HCM) is a national practice of seasoned professionals dispersed throughout the United States with access to the deepest sources of capital dedicated to healthcare investments. The group specializes in providing healthcare real estate investors with acquisition, disposition and debt & equity recapitalization strategies across the continuum of care, including medical office buildings, skilled nursing facilities, long-term care facilities, and other post-acute care operations.

 

Source: HREI

The Top Markets for Medical Office Buildings

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The medical office building sector is considered one of the safest in commercial real estate investments due to, among other factors, a national trend to lower healthcare property operating costs.

“MOBs are a lot more efficient to run, cheaper to operate and are usually leased on a triple net basis which is attractive to investors,” Rodman Schley, senior managing director of BBG tells GlobeSt.com.

According to a recently released report by BBG, between 2005 to 2016 MOBs rose by approximately 50% to about 41,000 nationwide.

“Houston, Minneapolis/St. Paul, Boston, Atlanta and Chicago have the largest concentration of MOB construction projects. Nationally, the MOB market accounted for an estimated 22 million square feet in 2018,” Schley says.

The Dallas/Fort Worth area had the nation’s highest number of MOB construction completions from the third quarter of 2017 to the second quarter in 2018, according to the report.

“The region had nearly one million square feet of medical office space added during this period,” Schley tells GlobeSt.com.

Besides lower operating costs, the increased demand for medical office buildings can be attributed to growing investor interest, convenience and technology, the overall pursuit of a healthier lifestyle, changes in reimbursement and regulations and the aging population’s need for medical care.

The average asking rental price for MOBs rose to nearly $23 per square foot, a 1.4% increase year-to-year. This is due to an increasing demand for the limited supplies of high quality, newly constructed, medical office space and other outpatient facilities.

“The rate of construction and the renovation of MOBs will continue growing,” predicts Schley. “It’s definitely a strong MOB market. We have a lot of baby boomers and they have medical needs. We’ve also become much more health conscious as a society. We are certainly not at an over saturation point in the MOB sector.”

 

Source: GlobeSt.