With Medical Office Buildings In Short Supply, Investors Are Widening Their Nets

Although most healthcare real estate (HRE) professionals seem to agree that the fundamentals of the business haven’t changed much due to COVID-19, the pandemic seems to have accelerated at least one previous trend.

Investors appear increasingly willing to buy in HRE product types other than only medical office buildings (MOBs).

“Healthcare real estate used to basically mean medical office buildings,” said Philip J. “PJ” Camp, managing director with New York-based Hammond Hanlon Camp (H2), a healthcare investment banking and advisory firm. “But along the way it got expanded to mean seniors housing and long-term care, and now, I think, and this is being increased as a result of COVID. It’s further expanded to include post-acute care, behavioral health, inpatient rehabilitation facilities (IRFs) and others.”

Why the broadened focus in a post-pandemic world? Simply put, there just aren’t enough MOBs to go around.

A growing number of investors, including those with very deep pockets, have become interested in acquiring MOBs. That has created such strong demand for the product type that capitalization (cap) rates, or first-year estimated returns, are being compressed to historic lows.

“There’s been an awful lot of capital raised to invest in healthcare real estate,” Mr. Camp added, “and that capital has to go to work. And we’re seeing the demand for medical office buildings coming from a wide variety of investors, including a lot of private equity firms and the REITs (real estate investment trusts), which, by and large, have seen their stock prices recover” since the so-called COVID Crash of February to April 2020.”

 

Source: HREI

Medical Office Property Remains An Investor Darling, Post COVID-19

Once again medical office assets have proven their resilience against recessions.

According to a new CBRE report on medical office trends, investment sales of medical office properties experienced a moderate drop compared to most major property types last year as the pandemic gripped the United States. What’s more, investor appetite for medical office product appears to be growing in spite of a dip in healthcare employment in 2020. With a 50 percent drop in patient visits to medical office clinics in 2020, healthcare employment declined by 6.4 percent, according to Oxford Economics data. That was still significantly below an 11.2 percent decline in employment for the broader economy.

“Demand for medical office space for clinical healthcare services experienced a brief decline in 2020, particularly in the early months of the pandemic, when non-emergent outpatient services were suspended,” says Lorie Damon, managing director, healthcare advisory practice at real estate services firm Cushman & Wakefield. “Nevertheless, occupancy remained strong. Since then, healthcare providers that had planned to add new sites, relocate existing sites or acquire additional entities, have continued to do so.”

In fact, demand for space has accelerated as vaccinations were rolled out and new growth opportunities in the medical office sector have emerged as patients who deferred care last year returned, Damon notes.

“Medical office has been the ‘steady Eddie’ through two recessions,” emphasizes Chris Bodnar, vice chairman and co-head of healthcare & life sciences capital markets at CBRE.

In CBRE’s 2021 survey of healthcare real estate’s most influential REITs, institutional investors, private capital investors and developers, 80 percent of respondents said the sector is recession-proof. Property fundamentals data supports this view. Last year, medical office landlords collected more than 95 percent of rent due, according to data firm Revista LLC.

Bodnar says that medical office isn’t prone to huge rent peaks or valleys and last year’s rents were mostly flat. But about half of CBRE’s survey respondents are expecting a 2 to 3 percent increase in rent growth this year. The expectation for rent growth is based on pent-up demand for new space by medical providers that had put expansion plans on hold during the pandemic. A bump in rents for new product is also anticipated—partially due to an increase in construction costs that will be passed through to tenants.

Healthy Outlook

With medical office occupancy remaining stable throughout the pandemic, Damon notes that rents are already rising in some markets that have limited supply and steady demand for quality space. According to Bodnar, with little new product developed in 2020, there is now a dire shortage of new medical office space, which should push up rents.

“Oversupply in this sector was rare even pre-COVID-19,” Bodnar says. “As medical office developers are very disciplined—they don’t build on spec. Rather, they like to create an ecosystem of healthcare tenants that work together—or compliment each other—and then build around that nucleus. With the trend toward consumer-directed healthcare growing, particularly among millennials, providers are seeking space in locations convenient to the populations they serve.”

He notes physician groups and other providers are using GIS (Geographic Information Systems) modeling to look at demographics, population and insurance coverage to help determine where they should expand and how many physicians should be located in a new market. For example, with many young families with small children migrating to the suburbs, pediatricians may find this an optimal location to grow market share.

“Retail centers are on the list of potential sites, as existing space offers greater speed to market than new development,” Bodnar says. “Retail centers also typically offer attractive rental rates.”

Physicians and other healthcare providers prefer open-air centers, as they provide good visibility and can place signage directly above the space so patients can easily find them, according to Bodnar. Other advantages include nearby amenities, convenient access and abundant parking.

Damon notes, however, that medical office tenants’ criteria for space vary depending on the type of practice, patient population served and strategic goals. So, while retail and mixed-use centers are preferred by some types of physicians, they are not suitable for every type of healthcare service.

Growing Demand

Last year, investment sales of medical office properties fell by 12.7 percent, according to CBRE—far below the more than 40 percent drop in volume for traditional office buildings.

According to Cushman & Wakefield’s healthcare capital markets team, which is led by Gino Lollio and Travis Ives, investors have a very positive view of medical office, and many investors new to the sector are aggressively seeking acquisitions. But overall, acquisition activity has been somewhat constrained, largely due to supply constraints rather than a lack of investor appetite.

New investment funds pursuing medical office acquisitions are generally seeking core or core plus assets, with strong tenant bases and significant weighted average lease terms remaining, according the Cushman & Wakefield’s markets experts. These funds are mostly geography-agnostic, though some prefer the Sunbelt states.

Most investors in medical office real estate prefer buildings of 25,000 sq. ft or larger, located on or in close proximity to a hospital campus and anchored by a health system or a leading physician practice, according to Cushman & Wakefield’s team. Buildings within 250 feet of a hospital tend to provide the greatest rent premiums, as reimbursement by the Centers for Medicare & Medicaid Services (CMS) is 40 percent greater than for those facilities vs. off-campus healthcare practices.

The Cushman & Wakefield’s team notes that with strong competition for available assets, cap rates have compressed over the last year as investor demand increased. Yields have compressed as well, though compared to other commercial asset types, medical office yields remain attractive to investors.

According to CBRE data, the average cap rate on sales of medical office assets compressed by about 20 basis points year-over-year in 2020, with the average cap for portfolio sales declining by 100 basis points to about 5.52 percent. The average cap for individual sales dropped to 6.61 percent. Over the same period, the average price per sq. ft. for medical office buildings increased by 5.5 percent.

According to Bodnar, because of strong property fundamentals and a positive outlook, an increasing number of investors are switching their real estate allocations from traditional office buildings to medical office. Those new to the sector are often partnering with experienced medical office developers and operators.

Among CBRE’s 64 survey respondents who answered the question, a total of $10.9 billion in equity has been allocated to healthcare real estate investment and development activity in 2021. That’s approximately 11 percent below the results of the 2020 survey, but 6 percent above the survey administered in 2019. And of the 64 firms respondents to this specific question, only 13 are a healthcare REIT or an institutional healthcare investor.

For example, in January, MedCraft Investment Partners announced it was launching a $500 million joint venture for medical office acquisitions, and, according to The Wall Street JournalKayne Anderson Real Estate is getting ready to close a $2.5 billion fund and expects to allocate about half of it to medical offices.

Among the biggest private equity players, Blackstone and KKR have already made significant investments in life sciences real estate and are now seeking additional allocations in the medical office sector. In addition, Nuveen Real Estate, a global real estate investment management firm, has partnered with Healthcare Realty Trust, a REIT focused on managing, acquiring and developing outpatient medical facilities, to enter the medical office sector.

However, Cushman & Wakefield’s team notes that many of the large institutional funds now entering the medical office space are looking for immediate scale, preferably via large portfolio transactions or platform acquisitions.

 

Source: Wealth Management

Latest New York Transplant: $100 Million In Investments For South Florida Medtech Companies

A torrent of venture capital money continues to stream into Miami.

Latest to join is Ceros Financial Services, a financial advisory group that is raising $100 million over the next 12 months to fund emerging medical technology companies in South Florida and beyond.

Ceros’ first investment is in a name familiar to many in Miami’s medical technology sector: Memic Innovative Surgery, a robot-assisted surgery company based in Fort Lauderdale and Israel that is chaired by Maurice R. Ferré. Ceros is leading a $96 million investment in the company, which plans to have as many as 200 employees in the coming years.

“We think it’s going to be a unicorn,” said Ceros co-founder Mark Goldwasser, referring to the tech term to describe a company worth at least $1 billion.

Goldwasser, who is moving to Miami from New York, and business partner Chris Dewey were early investors in Mako Surgical, which Ferré co-founded. Mako, a medtech pioneer, was acquired by Stryker Corp. in 2013 for $1.65 billion and helped kick off the current wave of Miami tech momentum.

“South Florida has the geography and demographics to be the next medtech hub,” Ferré, son of the former Miami mayor of the same name, said in a statement. He could not be reached for additional comment.

Ceros has already invested $65 million in the past 14 months in companies, including Dania Beach-based OrthoSensor, whose device provides real-time data during knee-surgery operations; Miami-based Dermasensor, which uses advanced technology to evaluate skin lesions for cancer; and Ferré’s current company, INSIGHTEC, which uses ultrasound technology for non-invasive brain surgery.

Goldwasser is scouting office space in Miami to headquarter Ceros.

Ceros is looking to capitalize on Miami’s burgeoning tech, finance, and medical ecosystem, alongside its pro-business climate,” Goldwasser said. “Miami-area hospitals are hungry to grow and innovate. We’re seeing this huge wave here for economic reasons, lifestyle reasons — people my age, in their early 60s, are realizing they don’t need to be in New York anymore. You just need a laptop, tablet and a cellphone.”

Goldwasser most recently led National Holdings Corp., a New York-based parent corporation of several affiliated financial services companies.

 

Source: Miami Herald