Healthpeak has not revealed the specific properties that were part of its 14-MOB portfolio acquisition. But in its “Q1 Earnings Release and Supplemental Report,” the cover photo caption states that the property shown, which HREI has determined to be 601 Watkins Centre Parkway in Midlothian, Va., occupied by Bon Secours Mercy Health, was acquired in April. The timing and health system affiliation are consistent with what the REIT reported about the transaction. (PHOTO CREDIT: Healthpeak)
In a significant deal that took place in recent weeks, Denver-based Healthpeak Properties Inc. on April 30 acquired a 14-property, 833,000 square foot medical office building (MOB) portfolio for $371 million.
News of the purchase surfaced in the Q1 earnings report recently released by the publicly traded real estate investment trust (REIT) as well as during the REIT’s May 5 earnings call with securities analysts, during which officials discussed certain aspects of the acquisition.
In its Q1 earnings report, Healthpeak notes that the deal was an “off-market” one and that the facilities are all on hospital campuses or are in off-campus locations but affiliated with “investment grade health systems.”
The MOBs, according to Healthpeak’s Q1 report, are heavily concentrated in the markets of Minneapolis, Chicago, Philadelphia, Washington, D.C., Los Angeles and Dallas.
Opening or expanding a new hospital in Tennessee just got a bit easier.
State law requires health systems to prove their new facilities are needed, but lawmakers updated those rules, in part because of hospital closures in rural communities.
Unlike many businesses, reviving a hospital is a big bureaucratic lift. And obtaining what’s called a “certificate of need” from the state is one of the hassles. Sen. Page Walley, R-Bolivar, has several hospitals in his West Tennessee district that have been unable to reopen.
“This is going to relieve one of those impediments,” Walley said during the vote this week on final passage. “They are not going to have to go through that multi-month or even year process.”
The new law passed by the legislature, Senate Bill 1281, exempts the state’s most distressed counties from the certificate of need program.
Otherwise, the legislation — which took several years of negotiating with interested parties — is intended to streamline and modernize the process. It consolidates two oversight bodies and makes some attempts at updating rules to reflect the state of modern medicine, such as how to handle outpatient addiction treatment.
There have been efforts to do away with certificates of need, which don’t exist in Texas and 11 other states. The process has often been accused of stifling competition. Especially as more health systems try to build free-standing emergency departments, certificate of need laws have prevented some expansions in the Nashville area.
But Tennessee will continue to require hospitals, nursing homes and even hospice agencies to show there’s a need for their services in the area and to allow competitors to object.
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Booming is the only word to describe demand for medical office buildings,
With the nation slowly recovering from the COVID-19 pandemic, investors have concluded that the number one real estate investment opportunity today is MOBs. The formerly niche product has moved front and center as multifamily yields have compressed in recent years and the current retail and broader office investment landscapes have seen a large-scale disruption related to the ongoing COVID-19 issue.
The MOB asset class has exhibited consistent growth in recent years, buoyed by both increased demand for outpatient services and strong historical performance. MOBs are a significant subset of the greater office asset class and are growing in stature among experienced real estate investors. As the name suggests, MOBs are developed specifically for tenants in the medical field to consult with patients and perform various surgical procedures.
Supurva’s decision to invest in MOBs is coming at an opportunistic time as it seeks to create a portfolio of MOBs. It is the Company’s firm belief that that despite the economic turmoil caused by COVID-19 and the growth of telehealth, the MOB market has and will remain resilient. MOBs will sustain their power through the coming decades as the U.S. population ages, consumes more healthcare services, and receives more of those health care services at outpatient settings.
With advances in medical technologies, procedures that once could only be performed at hospitals or ambulatory care facilities can now be performed at the physician’s office, further fueling demand for MOBs. Investors are beginning to realize that MOBs represent an alternative asset class that is rapidly increasing in popularity.
“The number one takeaway from a recent real estate investment symposium was simple and straightforward,” reported Mr. Murphy, Supurva’s chief executive officer. “Investors should liquidate their other real estate holdings and put their money into MOBs. For real estate investors seeking a steady return on their investment the only safe, secure, and reliable real estate investment opportunity today is clearly MOBs. Supurva will be working with real estate professionals throughout the country to identify undervalued and underutilized medical office buildings.”
Jones Lang Lasalle, a leading real estate investment company reported in a February 2021 article that despite the economic downturn of 2020, there has been no downturn in demand for MOBs. Despite the financing obstacles witnessed during the pandemic, sales of MOBs exceeded $13 billion in 2020, which was on par with pre-pandemic sales levels in both 2018 and 2019. While other real estate investments declined by an average of 33%, MOBs sales remained strong, further demonstrating that MOBs can withstand pandemic-related operational challenges.
JLL went on to report that medical offices remain a favored sector for real estate investment as evidenced by new entrants into the space, including institutional investors, private equity funds, and individual investors. The compelling investment thesis for medical office space has generated a significant supply of investment capital (both debt and equity) waiting to be deployed into this space, providing a very liquid and competitive market for sellers.
The demand-driven increase in healthcare services from a growing and aging population (10,000 people per day turning 65) has pushed hospitals and health systems to create lower cost outpatient care alternatives.
JLL is not he only real estate investment company focusing on MOBs. According to the CBRE Group, compared to other asset classes and the overarching office class specifically, MOBs generally exhibit uniquely steady long-term occupancy rates. CBRE data suggests that medical office vacancy rates have consistently been lower than the total office sector, with vacancy rates falling from 11.1% in 2010 to 8.4% by mid-year 2018. According to the CBRE 2019 Healthcare Real Estate Investor & Developer Survey Results, 99% of CRE firms stated that between 2018 and 2019 the occupancy of their medical office portfolios either remained stable or increased from the year prior.
The strength of MOB occupancy rates is partly due to the length of leases that medical tenants typically sign. Because the physical features of MOBs are very specific-offices, medical treatment rooms, surgical rooms, and waiting rooms-the build-out is often more costly than that of a traditional office tenant, and medical tenants typically sign longer leases for this reason. Tenants also tend to stay put longer given the high switching costs associated with relocating. In addition to stable occupancy rates,
MOBs have also exhibited consistent rent growth over the past ten years, which can be seen in the below graph. In 2018, the average asking rental price increased to almost $23/SF, a 1.4% increase year-to-year. Average asking rent for U.S. MOBs remained at a near-record level in Q2 2019 according to CBRE.
“MOBs represent the Company’s future and MOBs represent the RX for success,” Mr. Murphy commented.
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