Cap Rates On The Rise For Net-Leased Medical Market

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Medical uses continue to migrate away from their traditional homes on hospital campuses to retail-oriented sites.

Even as they are overshadowed by non-investment grade property volume, this “medtail” trend is growing in popularity among investors, sending cap rates up.

Year-over-year cap rates on single-tenant, net-leased medical properties were up by 22 basis points at the end of Q3 2018, according to a new report issued by The Boulder Group, a boutique real estate investment firm specializing in net lease property investments. The report, which looked at medical properties priced below $10 million, indicates that the third quarter 2018 cap rate was at 6.47 percent, versus 6.25 percent in the third quarter 2017.

“The increase in cap rates can be attributed to a higher concentration of properties located in secondary markets as well as the high percentage of non-investment grade tenants within the net lease medical sector,” said Randy Blankstein, president and founder of The Boulder Group.

These are favorable cap rates compared to the overall net lease market, though the year-over-year spread has slightly expanded. The current cap rate for general net lease properties is 6.38 percent, 9 basis points lower than net lease medical properties. This time last year, the spread was 5 basis points when the overall net lease cap rate was 6.20 percent versus 6.25 percent for medtail.

With a 6 percent cap rate and accounting for more than 55 percent of the supply for the overall net lease medical sector, dialysis-related properties are clearly the most attractive to investors. Newly constructed properties, and those with at least 11 years of remaining lease term, were even lower with asking cap rates of 5.85 percent, compared to 6.47 percent for all medical properties.

The sector is dominated by properties leased to Fresenius Medical Care and DaVita Kidney Care, two well-established, high-credit operators in the space. A Hammond, Indiana DaVita dialysis center sold in an all-cash transaction last month for $2.2 million. In a separate transaction, a DaVita-tenanted property in South Holland, Illinois sold for $3.7 million and a cap rate of 6.03 percent.

According to Blankstein, net lease medical properties typically provide rental escalations throughout the term of their lease, providing investors with an inflationary hedge and a balance to rising interest rates. Additional long-term factors that make medtail properties appealing include the general marketability and attractiveness of properties that are located within a retail corridor.

“The increasing popularity, demonstrated by sales volume and cap rate movement, is due to a variety of immediate and long-term factors,” said Blankstein. “The medical sector, and the specialized services it provides, is widely seen as e-commerce resistant.”

As popular as this sector has become, not all offerings have the same appeal. In the third quarter of 2018, 75 percent of the medical sector consisted of non-investment-grade tenants. Further, there are a considerable number of properties in secondary and tertiary markets. And, as demonstrated by asking cap rates, there is considerable disparity among the varying categories of net lease medical properties with dialysis properties having the lowest at 6 percent and urgent care facilities witnessing the highest cap rate at 7.3 percent.

In looking ahead, through the balance of 2018 and into 2019, Blankstein predicts that the single-tenant net lease medical sector will remain active as the long-term outlook for healthcare-related properties attracts investors.

“Resistance to e-commerce and the country’s aging demographic will keep investor demand strong in the net lease sector,” Blankstein said. “Investors across all profile types will continue to acquire single-tenant medical properties as cap rates remain attractive when compared to the overall net lease sector.”

Around the country, the Midwest’s median asking cap rate of 6.5 percent lags only the Northeast’s 6.6 percent. The South had a net lease medical property median asking cap rate of 6 percent in the third quarter while in the West, asking cap rates averaged 5.5 percent.

 

Source: REJournals

A Guide To Drug Addiction And Treatment Center Real Estate

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Most drug addiction and treatment centers are located in Florida and California.

A $35 billion industry that is poised for a lot more future growth, here’s what you should know about it from an expert who has spent the last decade involved in the industry. Jim Peake, president of Addiction-Rep.com. is considered a thought leader in the rehab & addiction area. He is also a consultant for Innovative Health Solutions.

GlobeSt.com: Can you explain the scope of the addition treatment business, such as how big physical facilities are, where are they mainly located?, etc.

Jim Peake: Scope of the business is new money is moving in and the smaller operators are selling out. It is getting harder to compete in the space. We are seeing more assisted living or senior living operators enter the space as well as hospice operators.

Most treatment centers seem to be located in Florida and California. The industry is pegged at about $35 billion. Physical facilities can be small as a 6-bedroom house to 20—300 hotel size operations. However typically most facilities seem to run in the 20-40 bed range if they are providing “residential treatment.” There are tons of out patient facilities and detox centers as well. Types of care are as follows:

1. Inpatient detox
2. Ambulatory detox
3. In patient residential care, known as RTC or Res.
4. Out Patient Care or OP, done in a doctor’s office
5. Intensive Outpatient or IOP, done in a doctor’s office
6. Partial Hospitalization Program or PHP, kind of in patient and out patient
7. Sober Living, living a “structured environment”

GlobeSt.com: Why will this be a trend in 2019? I imagine more people going for treatment, that sort of thing. But why?

Peake: Yes and no. Insurance carriers are pushing back on their reimbursements to the rehabs making it more and more difficult. They are sticklers for documentation and are regularly moving the goal posts on the rehabs.

GlobeSt.com: Who is in this business? Are there big name players involved?

Peake: Big players are publicly traded companies Acadia and American Addiction Centers. There are medium and larger players in the MAT space. (Medically assisted treatment – suboxone, methadone and vivitrol.)

GlobeSt.com: Are others getting into the business, and if so, why?

Peake: Private equity is entering the space with assisted living operators.

GlobeSt.com: What and where is the potential for commercial real estate within the industry?

Peake: Commercial real estate that can be zoned for commercial residential care is very desirable. Investors are seeking places similar in size to assisted living with 100 beds or more. The reason being is scale and profitability. Eventually all rehabs will be going “in-network” with their insurance which pays lower than out of network.

GlobeSt.com: What are sales like in the field? Are buildings having a boom in sales?

Peake: Yes, investing in the drug rehab space will return a higher per bed rate per night than Senior Living, hospice or other service however it comes with risks. The length of stay is 30-90 days on average. The challenge is these beds need to be refilled every 30, 60 or 90 days and the cost per new acquisition can be expensive. However, if the operator has a budget and a plan for marketing it can be very lucrative. Right now there are more open locations for rehab than there are operators. The most desirable locations are former Sr. Living operations because they typically have 80+ beds and the zoning for residential healthcare. They also have the potential to attract “in-network” operators. In-network does not return as high a reimbursement as out of network however if the facility is large enough they can do a volume business. Upon exiting the business the in-network providers command a higher multiple of EBITDA.

So yes a good time to invest if the property has enough beds and is located in a major metropolitan area 45 minutes or less from a major airport. I have properties in economically depress areas and they a slow in moving to market.

GlobeSt.com: Are there any special requirements for treatment buildings or special considerations?

Peake: All-inclusive, residential and care on the same property. Sprinkler systems, security, privacy, campus, parking, etc.

GlobeSt.com: Overall, what should commercial real estate people know about this as a rising business opportunity?

Peake: Know the right people in the space. The real estate is worth more with an operating profitable business….and if there is a CUP moratorium.

GlobeSt.com: Any pitfalls or things to avoid as well?

Peake: I would look outside of states of California and Florida if you want to get into the rehab business. I would stay away from New York as well.

 

Source: GlobeSt.

Healthcare Developers Need Flexibility To Succeed

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The world of healthcare real estate has experienced more profound change in the past few years than perhaps any other sector.

Along with advances in medical technology, the transformation of healthcare delivery by the introduction of Obamacare has led providers to demand different types of facilities. And that means opportunities for developers and investors, if they understand the marketplace’s new realities.

The construction of massive hospitals is no longer wanted, experts agreed at Bisnow’s National Healthcare Midwest 2018 event in Chicago. BEAR Construction Co. project executive Victor Senese moderated a panel that examined what builders can expect in the future.

“We’re not building any new bed towers,” said Jeff Janicek, vice president of healthcare for Skender, a Chicago-based construction firm. That is primarily because healthcare systems are now required to improve efficiency, and many providers have decided they can achieve these goals by caring for people in their own neighborhoods. “There is now more of a focus on specialty groups.”

And with Amazon and other internet retailers putting pressure on traditional retailers, now is also the perfect time for developers to create new medical offices at low cost.

“There is a ton of retail space available,” Janicek said. “The anchor store in a local mall may no longer be a grocery.”

“The current demand is so great that many providers’ chief concern is getting new outpatient facilities up and running quickly,” BJC HealthCare Executive Director of Planning and Design Donna Ware said.

She estimated it typically takes about 18 months to design and complete a medical office building.

“We need to be faster than that,” Ware siad.

But like Janicek, she believes the real estate already exists if you look in the right places. Buildings recently occupied by groceries, even pizza parlors and other restaurants, can serve as outpatient facilities after a relatively modest amount of reconstruction.

“Other types of development will be more complex,” Environmental Systems Design Operations Director Randall Ehret said. “The Affordable Care Act started a mad dash to outpatient facilities. Many of these delivered basic care, but in the years since providers have also started establishing new intensive care units and other facilities that use more advanced medical technology. A lot of these are infrastructure intensive.”

The shift to decentralized facilities doesn’t mean developers will always fix up old grocery outlets. In fact, with so many medical professionals moving away from big hospital campuses, office buildings dedicated to healthcare are growing.

“Twenty-five years ago, the medical office building was between 10K and 20K SF,” HSA PrimeCare President John Wilson said.

These structures were occupied mostly by small physicians’ offices. Today, HSA sees a lot of demand for buildings between 150K and 200K SF, sometimes dedicated to one tenant, such as a hospital system. Chicago-based HSA recently finished the 109K SF Drexel Town Square Health Center, an outpatient and diagnostic center in Oak Creek, Wisconsin, a Milwaukee suburb, for Froedtert Hospital System and the Medical College of Wisconsin.

Wilson considers it a model for the future. Like most new facilities, it treats people with a wide variety of concerns, and includes a cancer treatment center, an emergency room and many other services..

But what the panelists most emphasized was the need for flexibility in design. The clients for the Drexel building, for example, originally wanted about 75K SF, but after a deeper evaluation of the community’s needs, ended up asking for 109K SF..

“If demand for its services intensify, the building can be expanded even further to about 130K SF.” Wilson said “It has to be almost like an accordion.”

“Healthcare needs are always changing and new technologies are always on the way,” Ware added “so developers need to think ahead.”

Ehret said his firm puts a lot of thought not just into what a particular space needs today, but also what it might need tomorrow. A neighborhood’s pediatric unit may get replaced by a senior care provider as local demographics shift. New machines that did not exist when a room was designed may need to be squeezed in.

“And even though flexibility can carry a pretty hefty price tag, in the end healthcare providers will appreciate it,” Ware said.

 

Source: Bisnow