Medical Office Buildings Continue To Stoke Net Lease Investors’ Interest

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Medical office buildings have emerged as a favorite among investors interested in single-tenant net lease opportunities, according to a new report from Colliers.

Overall, the STNL space posted strong performance in the first half of 2022 and hit a historic high of $40.1 billion in investment sales, according Colliers. However, volume in Q2 fell 35% over Q1 numbers and 17% year-over-year.

Despite that, the medical sub-sector remains strong. Colliers’ Jay Patel cites as one reason “predictable” cash flows and the price range on assets that appeals to both institutional and private investors alike. In addition, there’s COVID-19:

“Pandemic investors flocked to the medical office sector for its perception as a safe, interest- resistant and now pandemic-resistant asset,” Patel says. “During the pandemic, investors were eager to snatch up anything medical-related regardless of lease term, credit, and location.”

Construction pipeline delays have also contributed to an ongoing chasm between supply and demand, which has compressed cap rates.

“Net lease has also risen due to the ongoing supply chain disruptions, slowing the delivery of new product,” Patel says. “This has pushed more healthcare tenants to consider alternative space solutions like the adaptive reuse of traditional office or retail properties.”

Of course, the capital markets have changed this year — and medical office isn’t immune to those shifts. Patel notes that “while capital is still being deployed, investors are no longer scooping up just anything that’s healthcare assets.”

“Buyers are now taking a closer look at credit, lease terms and location. With inflation looming in everyone’s mind, assets that have strong rent increases are experiencing stronger activity,” Patel says. “To bridge the gap for investors that are feeling the burden of this rising interest rate environment, many developers and sellers are starting to shift pricing, which is creeping back toward pre-pandemic standards.

Colliers Julie A. Johnson predicts the asset class will continue to be strong in the near future despite rising capital costs.

“The past several years have been banner years for investors with historically low cap rates and many more buyers in the market than sellers,” Johnson told GlobeSt.com in an earlier interview. But “medical office buildings will continue to be strong with not only the increase of the senior population but also the population increase in many markets, specifically the Sun Belt cities.”

Patel says good lease terms and credit will be critical moving forward into 2023. While previously just one of those elements was needed to sell a property.

“Today’s market conditions necessitate all three factors carrying equal importance when appealing to investors,” Patel says.

 

Source: GlobeSt.

AEW JV Acquires Eight Medical Buildings In Seven States Across The Southern And Midwestern U.S.

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A joint venture between AEW Capital Management and Flagship Healthcare Trust have completed the acquisition of eight medical buildings totaling 145,561 square feet in seven states across the Southern and Midwestern U.S. in a series of compounding transactions.

The purchase was financed through a loan by Fifth Third Bank, who had secured a senior credit facility for the buyers. Following the acquisition, Flagship will provide property and asset management services for the portfolio.

The facilities, which consist entirely of ambulatory surgery centers, are located in Texas, Arizona, Michigan, Illinois, Missouri, Tennessee and Florida. Nearly all of the tenants leasing space within the portfolio specialize in health care, with three quarters of them in top five national surgery centers and health systems.

Two of the properties in the portfolio include the Kleimen Evangelista Eye Center, located at 350 E Interstate 20 in Arlington, Texas, and the Joliet Surgery Center, located at 998 129th Infantry Dr. in Joliet, Ill.

The Kleiman Evangelista Eye Center was built in 2015, and was previously owned by the Inland Real Estate Group, who had purchased it in 2017, according to CommercialEdge information. The property totals 27,500 square feet and is fully occupied by a leading Texas ophthalmology provider. Situated the Interstate 20 highway, the facility can be quickly accesses by patients throughout the suburbs of Arlington, as well as the larger Dallas-Fort Worth area.

Fifth Third Bank Executive Managing Director Michael Perillo oversaw the financing of the transaction.

The Medical Office Mires

Health-care and life science facilities remain a resilient commercial real estate investment, with investors eager to get their hands on these properties. The sector recorded more than $2.9 billion in transactions in the second quarter of 2022, according to data from a report from the Brown Gibbons Lang & Co. While that marks a slight decrease from the $3.3 billion in the same period of 2021, it significantly outranks activity in other office markets.

Market Street Health Properties and Sixth Street recently created a platform to invest $300 million in medical office buildings around the nation.

 

Source: Commercial Property Executive

Study: North Texas Hospitals Have a $38.4 Billion Economic Impact

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Healthcare continues to be one of North Texas’ most important economic drivers, with an increase of $7.7 billion in economic impact since 2017.

A new study commissioned by the Dallas-Fort Worth Hospital Council shows that healthcare makes a $38.4 billion economic impact on the region.

“We were impressed by the significant increase and impact for North Texas over the past five years,” said Stephen Love, president, and CEO of DFWHC via release. “Such a positive economic impact is extraordinary, especially considering the challenges facing hospitals over the past two years during the COVID-19 pandemic.”

The study, which DFWBGH’s Board of Trustees commissioned, highlights statistics provided by the 90 DFWHC hospital members. The institutions provided $26.1 billion in labor income, $5.9 billion in retail sales, and $6.4 billion in federal, state, and local taxes. The members also represented 372,988 jobs in 2022, an increase from 295,138 in 2017.

The numbers from this region reflect a recent U.S. Bureau of Labor Statistics report from 2020, saying that the healthcare sector will add 2.6 million jobs over the next decade, with nurse practitioners growing incredibly quickly, at 45.7 percent. As the Baby Boomer population ages and has increased chronic conditions, healthcare will be more in-demand than ever, and healthcare is expected to grow quicker than any other industry.

The economic impact was measured by calculating the business transactions of all industries within a hospital’s service area, DFWHC’s region, and the state. It also measured the hospital and employee spending while calculating the number of jobs and income created through healthcare positions.

Despite the economic impact, many hospitals are struggling to stay in the black. Because reimbursement rates are negotiated yearly, it is more difficult for healthcare entities to increase prices if the cost of supplies and labor fluctuates, as they have in the last year. Bloomberg reported in September that 53 percent of all hospitals to lose money in 2022. Delayed care due to the pandemic has resulted in sicker patients, labor shortages have forced providers to increase pay to attract talent, and inflation has raised input costs.

Consulting firm Kaufman Hall and the American Hospital Association research showed that in 2019 and 2021, around 35 percent of hospitals experienced losses, but in 2022 and 2020, more than half had negative margins. Staffing turnover and paying for travel nurses to address shortages have been significant cost drivers. Nationwide, the Kaufman research said that expenses for U.S. hospitals would climb $135 billion over last year’s levels, with $86 billion representing labor cost increases.

But increased salaries, real estate, and material costs for hospitals all equate to a more significant economic impact, all while many hospital systems struggle to stay profitable. In many areas, the hospital is the largest employer in the region, and as organizations move toward building hospitals as wellness centers, they play an increasingly important role in communities.

The DFWHC study was created by Ann K. Peton, director of the National Center for Rural Health Works and the National Center for the Analysis of Healthcare Data.

“These numbers show North Texas hospitals do much more than just provide medical services,” said Peton via release. “The employment and income generated and the ripple effect in other businesses throughout the economy are enormous. The study clearly demonstrates that DFWHC-member hospitals are major players in economic development in Texas.”

 

Source: D CEO Magazine