Five Reasons For Physicians To Invest In Medical Office Buildings

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Medical office buildings are becoming increasingly attractive to investors and real estate managers due to their stability and upside potential.

Here are five reasons why medical office buildings could be a good investment for physicians, according to a June 5 report from Benzinga and CityVest, a real estate investment platform.

  1. The healthcare industry is resilient through changing economic cycles. The need for healthcare and treatment of patients will always exist and is not subject to market downturns.
  2. There is a trend toward treating patients in medical office buildings and outpatient settings over hospital settings. Medical office buildings often have high occupancy rates and long-term leases.
  3. Medical office building tenants typically stay in one place for a long period of time, so they are willing to accept leases with renewal clauses and steady rent increases. Medical office building tenants have high expenses associated with moving, so retention rates are good.
  4. Medical office buildings draw in a diverse tenant base, with many different specialists that maintain a steady income.
  5. Over 4 million Americans will turn 65 this year, and baby boomers will start needing more medical care. Demand for medical offices will continue as people need more medical care.

 

Source: Becker’s ASC Review

On-Campus Medical Office Pricing Now Exceeds Off-Campus Assets

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Limited availability of on-campus medical office assets has led to its pricing to uncustomarily exceed that of off-campus assets in Q1 2023 for the first time since Q1 2020, according to a report from Cushman & Wakefield.

Some are seeing the sector as a safe harbor during these challenging economic times.

Jason Anzalone, managing director of development, Cypress West Partners, tells GlobeSt.com that macroeconomic volatility has led investors to pursue safe harbor investment options.

“They have found them in on-campus medical office assets that provide immediate adjacency to acute care facilities, often have health system occupancy, and credit quality and assurances of long-tenured occupancy,” says Anzalone.

C&W’s report said that off-campus transactions have historically made up a good majority of transactions over on-campus facilities.

“With often limited land and many healthcare systems holding ownership of on-campus assets,” Cushman wrote.

Since 2020, off-campus transactions have held an average 5% premium over on-campus in terms of pricing. Occasionally, off-campus averages have fallen below that of on-campus – notably during Q1 2020 at the start of COVID-19 and now, in the preliminary values for Q1 2023, according to the report.

Average cap rates for on-campus assets have grown by 50 bps to an average of 5.5%, while off-campus has risen by 45 bps to an average of 6.5%.

“As with overall transaction volume, both on-campus and off-campus assets have dropped during the second half of 2022,” according to the report.

Volumes for both categories remained relatively strong compared to pre-pandemic historical levels during the middle two quarters last year.

On-campus transactions exceeded $800 million, while off-campus transactions were above $2.5 billion. In Q4, transactions in both categories were much more limited, with off-campus transactions falling by 50% while on-campus receded to only $696 million.

 

Source: GlobeSt.

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Specialized HealthCare Assets Lead To Specialized Buyers

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The healthcare sector is by no means immune to changing economic conditions, but among commercial real estate investors, medical facilities continue to be among the most popular and desirable investments. An aging U.S. population has driven demand for all types of healthcare properties—from more traditional medical office buildings, physicians’ offices and urgent care facilities to highly specialized properties including behavioral health, post-acute care facilities and micro-hospitals. But as healthcare facilities become more specialized, we’ve seen buyers become more specialized as well.

Some healthcare and medical investors see value in acquiring assets with high acuity uses and expensive finishes and build-outs. High revenue potential and replacement costs for these properties provide investors with certainty of continued use by the tenant. Other investors have become focused on properties leased to health systems, and see an opportunity to foster relationships with their tenants for long-term success. Still other investor groups recognize that high construction costs have created opportunities to acquire value-add facilities, including second-generation medical office buildings that are ripe for renovation or redevelopment. Regardless of an investor’s chosen lane of specialization, ever- increasing demand from consumers will continue to drive the need for new healthcare facilities, creating more and more opportunities for investors to enter the sector or add to their existing portfolios.

Large Pipeline

Healthcare development is occurring throughout the U.S. as consumer demand can be found across all regions and in markets of all sizes. Unsurprisingly, the state of Florida currently leads the nation in new healthcare development. With more than 21 percent of the population over age 65, demand from retirees and aging Americans are keeping developers busy.

As these new developments come online, they’re capturing the attention of a variety of buyer groups. While REITs and institutional investors have historically been quite active in the sector, changing market dynamics have caused these buyers to become less competitive over time. The desire to acquire healthcare assets remains strong, but with more buyers now active in the sector, the available supply of properties is not enough to meet investor demand. Private equity funds, family trusts and individual investors have come to appreciate the stability and increasing demand forecasted for the sector, and REITs and institutions are simply being outbid by buyers with access to low-cost capital and a strong appetite for the product. As a result of this demand, we have seen the single-tenant healthcare sector grow in annual transaction volume, demonstrating a nearly 150 percent increase in the last 10 years.

Looking ahead, however, the gap between buyer and seller expectations will cause transaction volume to decline, and activity is expected to be suppressed for at least the next 12 months. The ability to sell at unprecedented pricing is likely a thing of the past and is no longer a primary motivation for owners. Instead, in the next 18 to 36 months, conditions motivating a sale should center around debt maturity and the need to refinance. In today’s environment, sellers will need to price their assets for today’s buyers or risk chasing the market, while buyers shouldn’t ignore good fundamentals. As buyers and sellers see-saw their way closer to alignment on pricing in the coming quarters, the market can expect to see activity resume, although the lack of supply could be problematic for some time given anticipated demand.

By Toby Scrivner, senior vice president at Northmarq.

 

Source:  Commercial Search