For Medical Outpatient Building Investment, ‘It’s The Time To Transact’

In a sign that the medical outpatient building (MOB) sales market is turning the corner, Ryan Crowley, executive VP and chief investment officer with Nashville, Tenn.-based Healthcare Realty Trust Inc., said in recent weeks that the number of investors making offers on properties has increased significantly in recent months.

In noting that Healthcare Realty has sold “a lot of buildings this year,” Mr. Crowley said, “I’d say the market has markedly improved in the second half of the year from the first half of the year.

“In recent transactions, we saw the amount of bidders that have shown up has blossomed,” Mr. Crowley said. “At the beginning of the year, for similar profile deals, we might get … 50, or 40 signed CAs (confidentiality agreements) and maybe three, four offers. But recently, if we had the same deal, we’ll get 100 CAs signed and maybe 25 offers. There are a lot of people who are finally showing back up, which I think is the uncertainty that’s come out of the marketplace. And, with the uncertainty coming out of the market, the lenders have shown back up … even though the lenders are back in the market, they’re not necessarily flush with cash. When you look at all the debt maturities on the lenders’ books, they’re doing a lot of extensions; they’re not getting the loans paid off, so they’re limited by how much money they can put out, even though they do have some money to put out. So, the best opportunities in the market are those that can be easily financed. Some of the deals we’ve done here most recently, large health system-anchored, long-term WALT (weighted average lease term), or high-quality buildings in secondary markets, are in demand from investors.”

Mr. Crowley provided his observations during the recent 13th annual InterFace Healthcare Real Estate (HRE) Southeast conference at the Hilton Nashville Downtown. Hosted by Rich Kelley, senior VP of the InterFace Conference Group of Atlanta-based France Media Inc., the conference was held on Nov. 18-19 and included seven panel sessions.

Mr. Crowley was part of a session titled “The State of the Healthcare Real Estate Market Heading into 2025.”

The panel discussion was moderated by Andy Dow, an attorney, shareholder and chair of the Real Estate Industry Group with Dallas-based Winstead PC.

The other panelists comprised:

■ Ben Appel, executive managing director with the Healthcare Capital Markets team of Newmark Group Inc. (Nasdaq: NMRK);

■ David Braunstein, senior VP of investments with White Plains, N.Y.-based Rethink Healthcare Real Estate;

■ Cole Reethof, VP with the U.S. Healthcare Real Estate Capital Markets team at CBRE Group Inc. (NYSE: CBRE); and

■ Randi Ruble, senior VP of real estate development with Pensacola, Fla.-based Catalyst Healthcare Real Estate.

As Mr. Dow opened the discussion, he noted that MOB sales have remained slow for most of 2024 – at anywhere from $2 billion to $2.5 billion per quarter, according to data from Arnold, Md.-based Revista – and that long-term interest rates have not been affected by two second-half cuts to the federal fund rates by the U.S. Federal Reserve Bank.

“It looks like, for now, long-term rates aren’t going anywhere, even when the Fed starts cutting its rate,” Mr. Dow said. “So … where does that leave us heading into 2025? And I think the best place to start on that is, how do you build your capital stack today? And as you’re looking at your pipeline, let’s talk about the debt side of it first, assuming rates aren’t going down quickly anytime soon, how is that impacting your capital stack, how’s that impacting what you’re trying to do in 2025?”

Mr. Reethof said the professionals on the CBRE team “have seen a lot of equity coming back into the space … a lot of capital that wanted to get into the space. There are a lot of groups that are looking for operators (long-term HRE firms that can own and manage properties.) The operator is the premium here and I think that’s still the case.”

He added that the sales market has been bogged down because many institutional investors prefer to “write big checks (for more expensive, perhaps portfolio deals). But, because of where cap rates are, those portfolio aggregators aren’t looking to trade out right now … it made sense three years ago when they could get the debt premium, as a buyer was able to get a tighter spread when you pulled 25 assets at $250 million.”

“That could be turning around,” Mr. Reethof said. “We’ve heard from institutions and pension funds looking to increase their allocation to medical office, and some of their fundraising this year has been better than they thought it would be. So, they’re going to be back in the market quicker than they thought. From my perspective, I think there is still capital out there. But, you know, it’s the pricing issue that’s keeping everyone down.”

Mr. Braunstein of Rethink Healthcare, a long-term investor in the HRE sector, said that many would-be buyers are currently considering “how their equity is aligned in terms of return profile to define what the opportunity set is. If you have equity that wants traditional value-add or opportunistic-oriented returns,” it’s currently hard to find acquisition opportunities.

“However, if you have equity that is comfortable with core, core-plus oriented returns, you can get a lot of stuff done right now,” said Mr. Braunstein. “Looking ahead to 2025, there’s probably going to be more of an opportunity set in terms of just what the transaction volume looks like, and I say that because we still have an uncertain interest rate environment. There are people who were hoping we’d be on the down slope of interest rates, and that seems to have plateaued, and if you’re sitting on a portfolio that’s five, six years old, and you have investors that … need some liquidity elsewhere, you’re probably going to maximize your returns in 2025 relative to 2026, ‘27 and ‘28, because cap rates aren’t going down to a level that is going to allow you to recoup the difference in your IRR (internal rate of return) with that time value.”

The Time To Transact

Mr. Braunstein added that sales will likely pick up in the next year because it’s time for owners to sell and investors to buy.

“I think we’re going to hit a capitulation point where folks like Cole (Reethof) and Ben (Appel) are going to be busy, just because it’s time,” said Mr. Braunstein. “No one’s going to be kicking the can down the road for a better day. There, unfortunately, is no better day if your IRR is zero, right? Or negative one and it gets back to zero. So, it’s the time to transact.”

Mr. Appel of Newmark said he also believes the current time is a good one to buy, at least for private buyers.

“I think the excitement in the market, especially on the private side (maybe not just yet for the REITs) … is that this higher (rate environment) gives more of a buying opportunity, right?” Mr. Appel asked rhetorically. “Cap rates are still elevated, but the strong underlying fundamentals haven’t changed the asset level. And so, there’s more of an opportunity. Instead of having a couple of months of a window to go buy as much as you possibly could, like at times in the past, with the three rate cuts that we’ve already seen, and with maybe one more … it seems like that window has expanded. If all of that plays out perfectly, in theory, you could look forward a couple of years, there is some implied yield compression… Revista did come out with its reports recently, and regardless of where we are from a standpoint of a decline in total transaction volume, I think a lot of that is driven by the massive decline in larger portfolio trades and recapitalizations, right?”

Although the prices for MOB deals have decreased dramatically in the past couple of years, with “lender ticket writing coming way down, at the same time, the public markets have rebounded very significantly. The coffers are filled very significantly.”

He noted that during the height of the MOB sales market a few years ago, about 60 percent of the volume was attributed to portfolio transactions. That has dropped to about 15 percent to 20 percent, meaning that the market is still seeing plenty of transactions, but they are at smaller prices.

“I think, overall, the sentiment (toward making transactions) has really accelerated to the positive,” Mr. Appel said. “We’re hearing a lot of fund managers and CIOs (chief investment officers) saying that their deployment into medical office is way, way down relative to other sectors” and that they would like to change that trend. So, as we see all of these things sort of coming together simultaneously, the opportunity to deploy capital in medical office in the next year or so, call it 2025 to 2026, things seem to be a lot more exciting.”

In agreeing with the other panelists, Mr. Reethof of CBRE noted that the recent “loosening up” of the debt markets has helped, and will help the acquisitions market.

“The syndication markets were frozen for a while,” said Mr. Reethof, “but they’re starting to thaw out. So, you’re starting to see a couple of transactions, earlier this year, where banks that were not typically holding nine-figure debt sums, were taking that all down at once. I think that sort of liquidity has helped, especially in the last couple of months, as those rates dropped. For the most part, I think banks are back to lending. And, you know, besides your DSCR (debt service coverage ratio) requirements that are limiting your LTVs (loan to values) to 60 percent, maybe 65 percent, I think there is relatively available debt. Value-add deals (have some) issues … but I think that’s on the equity side as well. The lease-up play has to be really strong for debt and equity for there to be buy in.”

Mr. Braunstein of Rethink Healthcare added that there is still some frustration with the “debt capital markets … which is to be expected, just given the macro-environment. But, there is liquidity out there if you have the right profile asset and the right cash flow profile to support the debt.”

Development Remains A Tough Market

Mr. Braunstein noted that “development has been challenging in terms of construction financing.

“If you have a 100 percent pre-released project, you can get it out of the ground,” Mr. Braunstein said. “But, if you have any sort of pre-leasing or leasing risk, you could have trouble getting the proceeds for it. People forget that you need a full capital stack; debt allows for real estate markets to function. While people sometimes are buying all cash, leverage is really what makes our world go round, and we are not in equilibrium at the moment.”

Ms. Ruble of Catalyst, which is focused on development, told the audience that Catalyst is “one of the developers that has a pipeline based on preferred development listing. So, we are coming in 100 percent leased from the get-go and we have our lenders on call and we know who to match with which development partner that we’re going after with for the end user. So, we already know some of those stats coming into it, so it’s a little bit easier for us to get through that process. Debt is not necessarily our biggest issue right now.”

She agreed with Mr. Braunstein that the development market is “challenging, but … if you are sitting in a situation where you’re building a project 100 percent for the end user (it can work well).

“For us, right now, while the market is difficult, of course, because you’ve got to structure it, it’s not as difficult as it has been,” said Ms. Ruble. “We actually have some projects coming off the shelves and back into construction mode and planning mode, which is great. So, we feel like there’s an uptick coming back because people are getting comfortable. There’s a stabilization in construction, so we feel like that’s helping the capital needs. Of course, we’ve got to look forward and, perhaps, with tariffs coming there, might become an issue with some of our materials, such as rooftop units and panels. But we’re still feeling like it’s moving in a positive direction.”

Source: HREI