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Medical Office Buildings Continue To Stoke Net Lease Investors’ Interest

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Medical office buildings have emerged as a favorite among investors interested in single-tenant net lease opportunities, according to a new report from Colliers.

Overall, the STNL space posted strong performance in the first half of 2022 and hit a historic high of $40.1 billion in investment sales, according Colliers. However, volume in Q2 fell 35% over Q1 numbers and 17% year-over-year.

Despite that, the medical sub-sector remains strong. Colliers’ Jay Patel cites as one reason “predictable” cash flows and the price range on assets that appeals to both institutional and private investors alike. In addition, there’s COVID-19:

“Pandemic investors flocked to the medical office sector for its perception as a safe, interest- resistant and now pandemic-resistant asset,” Patel says. “During the pandemic, investors were eager to snatch up anything medical-related regardless of lease term, credit, and location.”

Construction pipeline delays have also contributed to an ongoing chasm between supply and demand, which has compressed cap rates.

“Net lease has also risen due to the ongoing supply chain disruptions, slowing the delivery of new product,” Patel says. “This has pushed more healthcare tenants to consider alternative space solutions like the adaptive reuse of traditional office or retail properties.”

Of course, the capital markets have changed this year — and medical office isn’t immune to those shifts. Patel notes that “while capital is still being deployed, investors are no longer scooping up just anything that’s healthcare assets.”

“Buyers are now taking a closer look at credit, lease terms and location. With inflation looming in everyone’s mind, assets that have strong rent increases are experiencing stronger activity,” Patel says. “To bridge the gap for investors that are feeling the burden of this rising interest rate environment, many developers and sellers are starting to shift pricing, which is creeping back toward pre-pandemic standards.

Colliers Julie A. Johnson predicts the asset class will continue to be strong in the near future despite rising capital costs.

“The past several years have been banner years for investors with historically low cap rates and many more buyers in the market than sellers,” Johnson told GlobeSt.com in an earlier interview. But “medical office buildings will continue to be strong with not only the increase of the senior population but also the population increase in many markets, specifically the Sun Belt cities.”

Patel says good lease terms and credit will be critical moving forward into 2023. While previously just one of those elements was needed to sell a property.

“Today’s market conditions necessitate all three factors carrying equal importance when appealing to investors,” Patel says.

 

Source: GlobeSt.

Medical Office Commercial Real Estate Continues To Gain Strength

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Any medical facility likes to hear about improving conditions. That’s exactly what medical office buildings are experiencing: improved fundamentals that make property owners, investors, and operators healthy.

Colliers has a Q3 2022 report on healthcare real estate that covers performance in the top 100 U.S. markets.

“Despite economic concerns and industry challenges, the medical office property sector (MOB) continues to go from strength to strength, setting record highs for asking rents, sales volume, and pricing over the past four quarters,” read the report’s overview. “Demand is outpacing supply, vacancy remains tight, and capitalization (cap) rates have remained relatively stable. As a result, development activity is gaining momentum, reflecting confidence in the sector.”

But it comes with a caveat: the healthcare industry they depend on isn’t feeling so rosy. Pricing pressures are under way, and MOB owners that could mean monitoring and potential course of treatment.

On the plus side, average vacancy in the top 100 metros in the first half of 2022 was 8%. That was 40 basis points below the same period the previous year. The top 10 markets ranging from 6.3% in Boston to Houston’s 12.3%.

Top 100 average Los Angeles had the highest net MOB asking rents at $36.85 per square foot. That was quite the outlier.

“However, none of the other top 10 metros have an average MOB rent higher than $30 per square foot,” the report said. “Boston and New York are the next highest at $26.26 per square foot and $26.19 per square foot, respectively.” Although numbers for the lowest prices in the top 10 didn’t appear, a graph clearly showed that four—Atlanta, Boston, Dallas, and Philadelphia—were significantly below the national average.

To try pacing demand, construction rose, with completions of 14 million square feet in the four quarters ending with Q2 2022. That was up from the 13.7 million square feet from the previous 12-month period. MOB under construction rose more sharply, from 30.9 million to 37.1 million square feet.

And investor demand was strong at $17.2 billion in the four quarters ending with Q2 2022, the highest on record. Though that was largely due to the last quarter of 2021, which according to an included graph stood far above other quarters.

MOB is largely in a position to weather economic storms, as medical care is something difficult for many people to forego. But practitioners are also eying costs.

“In the face of reduced income and, in some cases, operating losses, some providers are cutting staff despite an overall shortage of employees in the healthcare industry.”

That would suggest real estate overhead will also be under scrutiny.

As an increasing amount of MOB is taken up by larger organizations—hospitals, HMOs, and other big operators—lowering those costs are likely to be on their agendas, and they have fiscal muscle to negotiate hard.

 

Source: GlobeSt.

Sila Zeros In On Healthcare With $1.3B Data Center Portfolio Sale

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With the sale of a 29-property data center portfolio, Sila Realty Trust is exiting the data center space to focus on healthcare.

Sila sold 29 data center properties to Mapletree Industrial Trust, a REIT listed on the Singapore Exchange, for $1.3 billion. The transaction will be completed in one or more closings during Q3 2021.

“This action marks another key step in Sila Realty Trust’s evolution to provide a clear path for the company to pursue a strategy as a pure-play healthcare REIT,” said Michael A. Seton, Sila CEO and president in a prepared statement.

Sila Realty Trust, previously known as Carter Validus Mission Critical REIT II, owned both data centers and healthcare assets before the sale.

As one example of the type of assets it seeks, last September Sila purchased Tampa Healthcare Facility, a 33,822 rentable square foot medical office building constructed in 2015. The building is located on 2.87 acres in Tampa, the second-fastest growing market in Florida and the twelfth-fastest growing market in the US. The facility, which was 100% net-leased to six tenants at the time of the sale, serves as a strategic location for both primary and urgent care, pediatric spinal care, clinical laboratory services and various types of outpatient surgery.

In the release announcing the sale, Seton said the company was focused on acquiring high-quality, well-located assets with a strong and diverse tenant roster.

“All of these attributes are indicative of our existing portfolio combination and we expect this property will serve as a strong complement to our growing asset base,” Seton said at the time.

It shouldn’t be a surprise that Sila is focusing on the medical sector. It has held up exceptionally well through the pandemic. While medical office buildings sales volume declined in 2020, it was much less of a drop than the other commercial real estate sectors, according to a report from Colliers.

MOB investment decreased 12.2% year-over-year in 2020 to hit $11.1 billion, according to Colliers, while cap rates fell 20 basis points to 6.5%. By comparison, commercial real estate posted a 32% decline in sales volume overall.

 

Source: GlobeSt.