Why Experts Say Now Is The Time To Buy Medical Office Buildings

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Despite all the doom and gloom of the news about the office sector, one component remains strong: medical office buildings.

It is buoyed by a stable clientele, long-term leases, and a slow pace of new entries. Even better, the buildings’ tenants can rely on a steady flow of customers in need of care. The flow has even increased as a result of passage of the Affordable Care Act, an aging population, and advances in medical technology that enable more procedures to be delivered in lower-cost, more efficient outpatient settings.

And investors are paying attention, according to the just-released 2024 report “Emerging Trends in Real Estate” issued by PWC and the Urban Land Institute. In total, the U.S. healthcare industry represents 17% of GDP. Outpatient care and care provided in medical office buildings is a significant share of the total.

“The sector has also been shifting to a retail mind-set, where hospital systems and providers look to attract new patients and build market share in new areas, contributing to the increased demand for high-quality medical space,” the report noted.

For landlords, medical offices are practically ideal tenants. They may sign leases of 15-20 years and are likely to renew them in order to remain close to their patient base.

“Typically, the renewal rate is 80% or more and rent growth generally ranges between two and three percent a year,” the report stated. “These dynamics have helped the medical office sector maintain healthy fundamentals throughout economic cycles.”

Furthermore, occupancy has risen in recent years as space absorption has outpaced square footage added. The occupancy rate was 92.8% in 2Q 2023.

Nevertheless, “after reaching peak investment volumes of $30.2 billion (annual basis) in the third quarter of 2022, medical office transaction volume has since slowed to $20.2 billion as of the second quarter of 2023,” the report noted.

But while it has slowed, it has not stopped. Transaction volume totaled $4.7 billion in the first half of 2023 – lower than the $10.1 billion sold in the same period of 2022, but consistent with levels seen from 2018 through 2021. Few distressed sales have occurred. The report attributed the lower transaction volumes to a “disconnect” between sellers and buyers.

“But the stage is set for increases in volumes when buyers and sellers can better come together and the capital markets begin to normalize,” it said. “The medical sector is large and investable, comprising over 1.5 billion SF of current inventory. A substantial amount of opportunity exists for investors to take on more ownership.”

By square footage, over half the sector is owned by users – hospitals, providers, and physician groups. The rest is owned by REITs and private investors who use a variety of structures and vehicles to make it work, the report noted. Institutional investors often invest through operating partners, frequently vertically integrated regional or national firms that specialize in the development, acquisition and operation of medical office buildings and often have deep relationships with hospitals, health systems and physician groups.

Speculative development is rare, leaving inventory to increase at a pace driven by tenant demand, currently around 1% and seldom rising more than 2% a year.

The opinion of experts surveyed for the report is largely favorable. Some 48% recommended buying, 46.4% said hold, and just 5.8% said sell. And while 34.3% considered the sector overpriced, that was a much smaller percentage than viewed suburban and central-city offices as overpriced. Some 61.4% thought medical offices were fairly priced and 4.3% thought they were underpriced.

“The medical office sector has matured into an attractive and stable CRE asset class of its own,” the report concluded.

 

Source: GlobeSt

Big Sky Medical Expands Dallas-Fort Worth Footprint With Medical Office Building Acquisition

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Big Sky Medical has acquired Richardson Medical Center I, a 118,472-square-foot medical office building in Richardson, Texas, from Pillar Commercial.

Bank of America provided the acquisition loan, according to Collin County records. Newmark represented the seller.

The property previously traded in 2019 as part of a portfolio transaction that also included the 120,000-square-foot Richardson Office Center II, CommercialEdge data shows. Pillar Commercial bought the duo from Buchanan Street Partners with healthcare conversion in mind for both assets. That same year, Methodist Richardson Medical Center purchased RMC II to accommodate the expansion of the hospital’s campus.

Originally completed in 1998, the two-story RMC I underwent cosmetic renovations in 2017. The property features 60,000-square-foot floorplates, a passenger elevator, controlled access and offers 720 car parking spots at a ratio of six spaces per 1,000 square feet. Its repurposing into a medical office building began earlier this year.

Located at 3101 E. President George Bush Highway, the property is some 20 miles Northeast of downtown Dallas. Medical providers in the surrounding area include the 334-bed Methodist Richardson Medical Center, Breckenridge Medical Plaza, Nova Medical Centers and Texas Health Neighborhood Wellness Cityline.

The Newmark team representing the seller included Vice Chairmen Chris Murphy, Robert Hill and Gary Carr, Senior Managing Director John Nero and Executive Managing Director Ben Appel, alongside Senior Managing Directors Jay Miele and Michael Greeley.

Big Sky Medical’s Texas Presence

Big Sky Medical has invested in more than 7 million square feet of health-care assets, valued at more than $2.2 billion. Earlier this year, the company expanded its Texas medical office footprint with several other acquisitions. The firm purchased Texas Tech Physicians of El Paso at Transmountain, a 110,465-rentable-square-foot medical office building in El Paso.

More recently, Big Sky Medical acquired a three-property portfolio totaling 110,636 square feet in metro Houston, from Caddis Healthcare Real Estate. The buildings are fully leased to Memorial Hermann Health System.

 

 

Source: CPE

Healthpeak Properties, Physicians Realty Trust Enter $21B Merger

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Healthpeak Properties and Physicians Realty Trust have entered into a definitive agreement to combine in an all-stock merger valued at $21 billion.

The new company will operate a portfolio of 52 million square feet of health-care facilities, of which 40 million square feet represent outpatient properties in Dallas, Houston, Nashville, Phoenix and Denver. The partners expect to generate run-rate synergies of more than $40 million by the end of the first year, and $60 million by the end of the second year.

Healthpeak will also assume Physicians Realty Trust’s existing debt and will enter into a new five-year, $500 million loan at a rate of SOFR plus 85 basis points. The tax-free transaction is expected to close in the first half of 2024.

Transaction Details

Under the agreement, each Physicians Realty Trust common share will be converted into 0.674 of a newly issued Healthpeak common share. Healthpeak and Physicians Realty Trust shareholders will own 77 percent and 23 percent of the combined company, respectively. The new firm will pay an annualized dividend of $1.20 per share.

Barclays and Morgan Stanley & Co. are Healthpeak’s lead financial advisors, along with J.P. Morgan, Mizuho Securities USA, RBC Capital Markets and Wells Fargo serving as additional advisors. Latham & Watkins LLP is acting as legal advisor for the firm. Physicians Realty Trust worked with BofA Securities and KeyBanc Capital Markets as lead financial advisors, along with BMO Capital Markets Corp. Baker McKenzie is acting as legal advisor.

The medical office market is returning to more stable fundamentals, after having weathered recent economic headwinds, a recent IPA report on the matter shows. Medical office projects only represent 10.7 percent of the overall national office pipeline. The main challenge the sector’s expansion is facing is the health-care labor shortage, rather than supply-related obstacles.

 

Source: CPE