Wall Street Analysts Laud Medical Office Building Sector During BOMA MOB Conference

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With medical office buildings (MOBs) continuing to show their resiliency amid the COVID-19 pandemic, it would only make sense that the product type continues trading at strong pricing and attracting an even wider range of investor types.

MOB sales volume in the first half of 2020, was $5.5 billion, “which was 10 percent higher than in the same period in 2019,” according to Mindy Berman of JLL. “This is really a ratification of medical office, and our sentiment at this point is (the volume) we will equal or exceed the 2019 level.” (PHOTO CREDIT: HREI)

Perhaps left out of the MOB buyer’s market of late have been the country’s healthcare-focused, real estate investment trusts (REITs). While their stock prices have rebounded in recent months from large drops at the outset of the pandemic, the REITs haven’t been as big of a buyer group as they normally are.

“But you know that puts the REITs undervalued right now, in our in our opinion, relative to their net asset value,” said Todd Stender, a senior equity analyst with Wells Fargo Securities. “That also is going to contribute to them maybe not growing externally as fast, if they don’t have access to the equity market. HTA (Healthcare Trust of America, NYSE: HTA), for example, does have some forward equity that they can tap, and they prudently tapped that market recently and I believe they have until June of next year to tap that equity.”

 

Source: HREI

 

Medical Office Building Sales Were $2B In 3rd Qtr., Occupancies Steady

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MOB sales have certainly been a bit sluggish since the onset of the COVID-19 pandemic, but not as slow as might’ve been predicted when the crisis first hit.

In fact, according to the latest MOB sales data from Arnold, Md.-based Revista, which provides a variety of HRE information for its subscribers, the volume was about $2 billion in the third quarter (Q3), matching the $2 billion recorded in Q2.

While the Q3 figure is still preliminary, it brings the year-to-date volume for 2020 to about $7.2 billion. It should be noted that Revista’s statistics include only sales involving “pure” MOB outpatient facilities (not administrative buildings) topping $2.5 million.

“Total volume is actually holding pretty steady,” said Revista Principal Hilda Martin during the firm’s Oct. 20 virtual 3Q Medical Real Estate Update and Outlook. “And if you look at the year-to-date total of $7.2 billion, that’s not far off from last year’s volume of $7.8 billion (through the first three quarters). In fact a lot of investors, such as Anchor (Health Properties); MBRE, now Remedy Medical Properties; Hammes; and Montecito Medical are remaining quite active.”

Ms. Martin was joined on the webcast, which provided a variety of MOB sector information and updates, by Revista Principal Mike Hargrave, as well as two executives, CEO Ben Ochs and James Schmid, the chief investment officer, with Media, Pa.-based Anchor Health Properties, one of the MOB sector’s most-active investors and developers in recent years.

Although the year-to-date volume is indeed stronger than what many might have anticipated at the outset of the pandemic, Q4 will need to be a strong one to keep pace with the MOB sales volumes of recent years, as Q4 2019’s volume was a robust $4.3 billion, bringing the year’s total volume to $12.2 billion.

Total MOB sales have topped $10 billion during each of the past five years, according to Revista data, with the past three years each topping $12 billion. The all-time best year recorded by Revista was 2017, when the MOB volume was $15.9 billion.

Mr. Schmid of Anchor, which expects to make MOB acquisitions totaling anywhere from $400 million to $500 million in 2020, said “The first half of the year, especially from February through June, saw a very limited amount of transactions. Some deals that had been under contract (prior to the pandemic) traded during that time, but there was a fair amount of disruption in the debt markets. And obviously, the equity REITs traded off for a good portion of that time, so it took a segment of the investment population out of the market. But our observation is that for the third quarter and the fourth quarter, people are trying to make up for lost time. And there was a lot of comfort gained with the performance of MOB owners’ portfolios during that time.”

Mr. Schmid added that he sees more of a return to “normal, historical volumes” in Q4, with a number of portfolio deals and recapitalizations taking place.

Cap rates have remained fairly steady so far in 2019, averaging about 6.4 percent for all deals, with portfolio transactions garnering a premium with an average cap rate of 5.9 percent.

Ms. Martin noted that private equity buyers have dominated the MOB investor pool so far in 2020, accounting for about 80 percent of the volume. Also, single property sales have accounted for about 65 percent of the volume so far this year.

Revista’s update and webcast included plenty of additional information and data about the MOB sector, including:

■ Demand remains very strong from a wide array of investors for MOBs nationwide, but particularly in the top 100 and top 50 markets, where cap rates have averaged 6.4 percent. Through Q3, MOB transactions have totaled $9.71 billion on a TTM basis in the top 100 markets, with Los Angeles leading the way with $818.9 million of volume and New York coming in at $755.9 million during that time. Los Angeles has had the lowest average cap rate in the trailing 12-month period at 5.5 percent, while Houston came in with the second lowest at 5.7 percent. “This sector has outperformed other types of commercial and residential real estate, and investor have gravitated toward stable cash yields and well-occupied buildings,” Mr. Schmid noted. “And like you said Hilda, the average deal in this sector is about $15 million to $20 million, and what that amounts to is a lot of capital chasing a lot of small transactions.”

■ The national occupancy rate for MOBs remains strong at 91.3 percent, which is basically the same, or close to, what it has been for the past nine quarters, according to Revista data. One of the reasons behind that steady performance is the strong absorption rate, which totaled 16.7 million square feet in Q3 on a trailing 12-month (TTM) basis. This absorption rate is the result of new MOB developments that were substantially pre-leased and delivered with high occupancies. “We’re just not seeing many tenants leave as a result of COVID,” said Mr. Ochs.

■ While year-over-year MOB rent growth in the country’s top 50 markets is slowing just a bit in 2020, it has remained relatively strong at 1.7 percent, compared with 2.1 percent a year ago in Q3 2019. The national average for triple-net MOB rents per square foot in the top 50 markets in Q3 2020 was $22.28 in Q3, according to Revista.

■ The market with the highest average triple-net MOB rents is Los Angeles, where the average PSF was $31.24 as of Q3. The next most-expensive market for MOB rents was Washington, D.C., with an average of $25.70 PSF, followed by New York at $24.60 PSF.

■ MOB construction remains strong. While Q2 and the start of the pandemic saw a slight slowdown in the number of projects started, Ms. Martin said there had already been a bit of a “pull back” at the beginning of 2020 after a strong finish to 2019. According to Revista data, 24.4 million square feet of MOB projects were started in Q3 on a trailing 12-month basis, with the amount of square footage underway during the quarter standing at 43 million, up from 41 million in Q2. Revista data also indicates the country is home to about 36,000 MOBs with a total of about 1.5 billion square feet of space. This typically grows by about 1.5 percent annually. “We saw several projects delayed in Q2, but those were mostly with lower-credit rated health systems,” Mr. Ochs said. “One has to remember that MOB projects are strategically purpose-built, and take a long time to bring to market as they are very carefully thought through from a programming of services perspective.”

■ As for the top MOB development markets, New York headed the list with 1.76 million square feet of space delivered in the four previous quarters including Q3. Houston was next with 672,456 square feet delivered in the last four quarters, followed by Chicago with 534,211 square feet of new MOB space. “We’re seeing strong development numbers in the country’s top 10 markets, with each of them seeing at least 200,000 square feet of new MOB space delivered in the last four quarters,” Mr. Hargrave said.

■ Employment in the ambulatory sector, which includes people working in MOB, surgery centers and other outpatient facilities, fell a whopping 17 percent from February to April, during a time when elective surgeries and procedures were shut down in most states. Since then, however, with most states opening up such procedures, employment in the ambulatory sector has nearly recovered all of those job losses, increasing by about a million jobs, or 16 percent, from April to September.

■ The use of telehealth, while still considered important now and for the future, is not likely to cut into the need for clinical space. According to data from Epic Health Research Network, the use of telehealth, or virtual doctor visits, accounted for about 70 percent of all outpatient visits in the early weeks of the pandemic. However, since then the trend has been reversed, with virtual doctor visits accounting for about 21 percent of all outpatient visits through July, according to Mr. Hargrave. Mr. Ochs noted, that “telehealth has played an important role during this time, and there are a lot of aspects of it that are here to stay.” He added that an oncologist told him that one of his patients, for example, has been able to avoid driving more than two hours for monthly follow-up visits. “But in other cases, in-person reviews with a doctor are necessary,” Mr. Ochs noted.

■ More and more investors as well as healthcare providers are preferring to invest in, or practice in, settings that are off-campus and away from urban cores, such as in suburban or tertiary markets. “It’s well-known that demand for health services moving to the suburbs and other markets,” Mr. Schmid said. “Healthcare services growth is chasing the rooftops and its mostly about wellness and keeping people healthy in order to avoid complications and more expensive (treatments) later on.”

 

Source: HREI

 

 

Real Estate

Texas Is ‘Going Big’ In Biopharma

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Texas wants to get the word out: It’s not just for oil and pipelines anymore.

The Lone Star State is a rapidly emerging biopharma hub, with more than just a lone focus on oncology. Houston and Austin are home to some of the top up-and-coming biopharma companies, and real estate powerhouses like Hines are anchoring major new developments with them.

Ridgeline Therapeutics is one such company, established in 2012 and spun out of technology invented by founder and CEO Stan Watowich at the University of Texas Medical Branch. Ridgeline develops small molecule inhibitors of nicotinamide N-methyltransferase (NNMT) to reverse Type 2 diabetes, obesity, muscular dystrophies and sarcopenia (age-related muscle degeneration).

During the past year, the company has begun to ramp up, hiring, applying for funding, developing the program and advancing projects closer to IND filing and clinical trials. How has their residence within JLABS@TMC, part of the Johnson & Johnson Innovation-JLABS incubator ecosystem, helped during this year of rapid acceleration?

“Working in Houston, for a biotech company, I think is great,” Watowich said. “The ecosystem, it’s not small, but it’s not out of control, so you can actually get to know many of the other companies, the other CEOs, see what they’re up to, share ideas, thoughts…the even bigger thing is you have access to all of these academic labs.”

Texas, and Houston in particular, has certainly caught the attention of the real estate development market. Audrey Symes, Director of Research, Healthcare, Life Sciences and Advisory at JLL, an American commercial real estate services company, explains why the city is at the top of their up-and-coming markets list.

“There are a couple markets that are right at the gate, ready to go, but I would say that the number one that is really emergent right now is Houston,” Symes said. “Houston has an amazing network of both medical practitioners and incubators, universities such as Baylor [The Baylor College of Medicine], the Texas Medical Center, and MD Anderson I think is the premier cancer research hospital in the US if not the world. So Houston has been really at the precipice of rising into the next rank for quite some time.”

Academic institutions rounding out the illustrious network include Rice University, The University of Texas Health Science Center at Houston,  Texas A&M University, and The University of Texas Southwestern Medical Center in Dallas.

“You have a lot of idea flow coming out of this, and a lot of people thinking about starting companies,” Watowich explained.

With the commanding presence of the MD Anderson Cancer Center, the largest cancer center in the U.S., and one of the most preeminent in the world, the assumption would be that oncology is the state’s number one focus. According to Watowich, it is only at the center of a wide range of therapeutic passions:

“I would say oncology is definitely a strength in the medical center,” said Watowich. “Because you have MD Anderson, you have the Baylor college of medicine, you have some of the hospitals with their specialized care. But I would say neurological diseases are a strength, metabolic diseases are a strength, muscular diseases are a strength…it’s hard to say where there’s not a strength.”

Hines is a privately owned global real estate investment, development, and management firm traditionally known for its office spaces. The company has been diversifying significantly during the past decade, and two of their key focus areas – life sciences and senior living– mirror two of society’s biggest current priorities: healthcare and the rapidly aging population.

In July, Hines finalized a deal with 2ML Real Estate Interests to build a mixed-use life sciences and technology-based development called Levit Green, next to the Texas Medical Center. The company plans to break ground on the phase I building in the third quarter of 2021 and complete construction in late 2022.

“It’s not often that an organization can have the opportunity to develop 50 plus acres adjacent to the largest medical center on the planet. That opportunity came along, and we thought it was absolutely intuitive that you could marry up that type of opportunity next to something like the Texas Medical Center,” said John Mooz, a senior managing director, and market head of Houston/Austin/San Antonio at Hines.

For industry and real estate developers alike, the cost of building, and cost of living can often make the difference when deciding where to locate.

“In our trying to understand what the best end-users are for Levit Green, I do think they will be both organically from here, but also locating from either coast where among other things, it’s expensive to build relative to Houston,” Mooz said. “You have gross rates that top $100 psf, and Houston can be almost half of that. And when you’re looking at a company with early-stage funding, that can be a huge difference. So I would argue that Houston can attract top talent and top organizations with an incredibly affordable quality of life, and strong diverse, cultural offerings. With the global oncology pharmaceutical market projected to be worth approximately $200 billion by 2023, Houston is primed to move to the top of any emerging life sciences cluster list. That’s a pretty strong trajectory in a place that spends a lot of time studying cancer. You combine it next to a medical center that has over 9,200 beds, and we have, by anyone’s count, somewhere in the order of 1100-1200 clinical trials going on right now.”

For all of its merits, Texas is still growing into the biopharma mentality when it comes to capital investment.

“Where Texas really falls behind is capital,” Watowich said. “It’s not that they don’t have money…most of the money is from pipeline and it’s hard to get them to understand that investing in biotech per se isn’t really that different from doing a very deep offshore oil well. The risks are comparable, the timeline’s comparable, and the money’s comparable.”

Watowich is working with other Houston and Texas leaders to launch the Accelerator for Cancer Therapeutics. This Accelerator will assist entrepreneurs aiming to turn their research discoveries into clinical-stage biotech companies supported by forward-thinking investors and non-dilutive funding.

“People need to be willing and accepting of taking risks. And culturally, that doesn’t happen everywhere,” said Travis McCready, Executive Director, U.S. Life Sciences Markets at JLL. “The three mega markets that exemplify this are greater Boston, the Bay area, and San Diego. They (Houston) have a really glowing and exciting creative scene, and I like the creative economy as a measure and metric of risk.”

“The other key for Texas is an injection of privately-led development dedicated to the life sciences market, Mooz said. “Texas Medical Center, I believe is the eighth largest business district in the United States, and the work and the development that’s gone on there is astounding. It’s mostly by in-place organizations and not privately-led development, and that’s what’s been missing. I think what we really need is purpose-built facilities to accommodate all of that R&D, and that’s what we’re trying to answer.”

 

Source: BioSpace