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Medical Office Building Investors Will Be Chasing Deals In 2020

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As we prepare to swing into the new year, the outlook for the medical office sector is good…largely.

Underpinning the market, as it always has, is the continual aging of the population and the increased medical services that come along with it.

But, despite this sure-bet demand, the sector is not without its challenges, as Al Pontius, SVP and national director of Marcus & Millichap’s Office and Industrial divisions, makes clear. Those concerns arise as a result of the massive industry trend toward consolidation and the move on the part of many formerly independent care providers to saddle up with national care brands.

The firm’s second-half Medical Office Buildings Report defines the growth of the merger movement:

“Hospital and health-system merger activity continues to transform the medical office sector, driving a reduction in physician-owned practices in recent years. In 2012, nearly half of locations were physician-owned practices, but in 2018, just 31 percent were owned by doctors.”

And therein lie the concerns for the existing stock of medical office buildings (MOB).

“There’s a lot of older-vintage product that’s not located where the health systems want to be,” says Pontius. “Some assets may not accommodate the desired configuration of services that the major health systems see as appropriate, modern enough or technologically supportive enough. Consequently, there are a number of buildings that will under-perform relative to newer properties in the sector as well as other asset classes.”

But while there might be assets that sit on the sidelines as healthcare needs grow, few investors, be they institutional or private, are doing the same.

“The consolidation has supported investor sentiment as major providers create efficiencies and broaden service coverage,” says the report. “A sizable pipeline of new space and major expansions by high-credit tenants will sustain elevated investment activity through the end of this year.”

 

Source: GlobeSt.

Investor Interest In Medical Properties Continues: JLL Closes $142.9M Sale Of 50-Property National Investment Grade Portfolio

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JLL announced today that it has closed the $142.9 million sale of a 50-property national investment grade portfolio totaling approximately 430,000 square feet across 22 states.

JLL represented the seller, Elliott Bay Capital Trust, and procured the buyer, a publicly traded REIT.

The sale of the Elliott Bay Dialysis Portfolio is a multi-state portfolio containing single tenant dialysis clinics leased to the two largest U.S. dialysis providers, Fresenius Medical Care and DaVita. The net lease properties are 100 percent occupied and backed by investment grade credit or New York Stock Exchange public companies.

Well located across 22 states in desirable major U.S. metro areas, the properties have mission critical infrastructure providing life sustaining dialysis treatment.  The significant investment in the fit out at these locations and arduous Medicare certification and state licensing creates high retention rates and long-term, inelastic tenancy – one of the main drivers for dialysis clinic investment.  Dialysis remains a fundamental and non-discretionary segment of healthcare services that has a long-term trajectory of growth and profitability regardless of the macroeconomic environment.

The sale was a collaboration between JLL’s Healthcare, Corporate Finance and Net Lease verticals led by Managing Director Mindy Berman and Vice President, Brannan Knott, Senior Vice Presidents Peter Bauman and Tivon Moffitt.

Knott, from JLL Capital Markets, Healthcare, described the portfolio as, “a rare, highly durable income portfolio, tenanted by the nation’s leading dialysis providers.  This is the exact investment profile attracting many investors into this sector and is supported by macro demographic trends of the nation’s aging baby-boomers and increased incidence of end-stage renal disease driving significant increases in dialysis demand for the foreseeable future.”

“JLL sees no slowdown in demand for medical office investments,” Berman added.  “We’ve seen consistent annual sales of $9 to $10 billion in the medical office sector and 2019 should be on pace with recent years.”

“Due to the portfolio mix of investment-grade and high-quality dialysis clinics, JLL was able to achieve excellent pricing for the seller with an accelerated closing time period,” Bauman said.

“Single-tenant medical properties and portfolios remain in high demand across various capital sources,” Moffitt added.

JLL Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. The firm’s in-depth local market and global investor knowledge delivers the best-in-class solutions for clients — whether investment advisory, debt placement, equity placement or a recapitalization. The firm has more than 3,700 Capital Markets specialists worldwide with offices in nearly 50 countries.

 

Source: HREI

Healthcare Construction Boom In North Texas: 79% Of New Dallas-Fort Worth Hospitals Landed In Denton And Collin Counties

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With a population of 7 million-plus, including aging baby boomers and young families moving in daily, North Texas is seeing unabated healthcare construction and investment activity, including seven new hospitals topping 800K SF in just the last year.

Medical facilities in the North Dallas suburbs and facilities centered around outpatient services remain the most prized commodities as the Metroplex tries to meet the area’s growing healthcare needs.

“In particular what is going on right now, in addition to the remarkable growth pattern, I think there is a lot of competition among healthcare providers,” Turner Construction Co. Director Steve Whitcraft said.

Whitcraft will be speaking on this topic at Bisnow’s The Future of Dallas Healthcare Real Estate conference Sept. 19.

“You have very strong providers in this market that are all very capable, differentiating themselves to best compete for those family services and also trying to get further out into the community. I think you are going to see more specialty facilities like heart and cancer centers and more satellite-type facilities with unique strengths to growing local neighborhoods,” Whitcraft said.

It is the growing North Dallas suburbs in particular where providers are setting up clinics and hospitals at a healthy pace.

“As the population continues to grow in the area of Collin County — it reached a population of a million this year  — healthcare facilities are expanding to the Planos, the Friscos, the Prospers and the Denton areas where we are seeing a lot of this growth,” McCarthy Building Cos. Vice President of Operations for the Dallas Business Unit Nate Kowallis said.

In fact, counties north of Dallas dominate CoStar’s list of healthcare projects and hospitals under construction.

“Since 2018, the region has added seven hospitals totaling 804K SF of new space,” CoStar Group’s Paul Hendershot said. “Seventy-nine percent is found in Collin and Denton counties, reflecting the high levels of growth in the northern suburbs.”

Healthcare projects under construction in the North Dallas suburbs include Texas Health Hospital Frisco, a collaboration between Texas Health Resources and UT Southwestern Medical Center; Cook Children’s Medical Center in Prosper, Denton County; and a new patient care tower for Texas Health Presbyterian Hospital Allen in Collin County, according to CoStar data.

Dallas-based pediatric hospital Children’s Health acquired a 72-acre parcel at U.S. Highway 380 and the Dallas North Tollway in Prosper earlier this year to construct a medical campus to serve children in the North Dallas suburbs.

Midlothian, a growing South Dallas suburb, has two medical facilities under construction, including Methodist Health System, a 190K SF full-service acute care hospital, CoStar data shows.

Dallas County also remains in play with the McCarthy | Crowther joint venture constructing The Parkland Outpatient Clinic 2 building, a ground-up, six-story clinic on the Parkland Health & Hospital System’s Dallas campus. The HKS-designed project will host a 540K SF breast cancer clinic.

Outpatient Care Maintains A Healthy Pulse

In DFW Despite some of those large projects underway, DFW healthcare investment and construction activity is focused less on larger hospital settings and more on smaller footprints designed to reach residents in DFW submarkets.

“Health systems and providers are increasingly focused on the delivery of care in lower-cost outpatient settings, and convenience for the consumer is of critical importance,” JLL’s Healthcare Capital Markets Group Managing Director Brian Bacharach said. “As DFW continues to expand, there will be increasing demand for outpatient facilities located within the growing communities.”

Even in the investment side of the space, outpatient services remains a primary focus of investors.

“The majority of third-party investment activity has been outpatient-focused, but there is virtually no speculative development in the space,” Bacharach said.

McCarthy’s Kowallis said he is seeing more construction activity in healthcare today focused on smaller facilities outside of major hospitals.

“There’s been a little bit of [construction] growth year over year, but mostly that has been with the medical office buildings, the clinics and the special care facilities,” Kowallis said. “That’s the big trend that we’ve seen, the shift from hospitals to more clinical or outpatient facilities.”

 

Source: Bisnow