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How Should CRE Bring In Healthcare Expertise?

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When The Connell Co. was looking to add new tenants to The Park, the development firm’s 185-acre live-work campus in Berkeley Heights, New Jersey, earlier this year, it felt that the moment demanded more than the usual marketing messages or amenity packages.

To be competitive, commercial real estate needs to offer future tenants assurance that any new space takes employee health and healthcare access seriously. The firm’s solution was to look for a medical partner of sorts to help offer healthcare as an amenity.

Eden Health, a telemedicine startup that focuses on primary care, will soon open an office on-site. For a small membership fee, tenants can become Eden patients, with access to same-day appointments with on-site physicians and therapists via the provider’s mobile app (the fee is “nominal”; representatives wouldn’t get any more specific). The Connell Co. will sponsor these memberships and pay a portion of the fee, viewing this investment as a step toward what it believes will soon be recognized as an essential amenity for all Class-A commercial properties — comprehensive healthcare.

“This is a holistic approach to wellness and lifestyle,” Connell Co. Senior Vice President of Hospitality and Marketing Stephen Kilroy said. “Employees can get access to primary care doctors right in the building, as well as simple things like flu shots.”

Having a medical tenant as a selling point, or even the cornerstone of a mixed-use development, isn’t anything new. Mosaic Development Partners has long made healthcare tenants a focal part of its strategy to finance and build community-focused commercial and residential projects. And the so-called wellness real estate trend has grown into an industry estimated to be worth more than $134B, with developers chasing new building standards such as WELL and integrating all manner of chemical-free fixtures and environmental amenities as selling points.

But Connell’s desire to make the advice and assistance of healthcare professionals part of its offering to clients is different. It speaks to the ways CRE is looking at how to make health access and awareness a best practice and amenity. Other companies have embraced different means of providing such expertise, often by hiring outside consultants: expensive HVAC upgrades focused on UV light and bipolar ionization, focusing on new cleaning routines, putting faith in new technology to encourage social distancing and even having medical professionals on staff.

Crocker Partners, a Boca Raton, Florida-based CRE firm with properties across the Southeast, made news earlier this year when it hired Dr. Walter Okoroanyanwu to be its director of environmental health. Earlier this summer, Okoroanyanwu, an epidemiologist with a CRE background, said that while many companies had talked about implementing health initiatives, Crocker sought to implement real changes, charging him with developing strategies and procedures to improve safety and wellness amid the company’s 11M SF portfolio. His main goal was figuring out how to stop the spread of COVID-19.

“Above all, we want to create a safe and healthy workplace,” Okoroanyanwu said in July. “Every day, COVID virus information is fluid, it’s ever-changing. You need somebody with my background who’s able to follow new information and research and convey it to the employees.”

While news of new vaccines provided a needed boost of optimism to real estate interests fearful of extended lockdowns and work-from-home directives, it is clear that reopening will be an extended process, vaccine rollouts may take months and months to filter through the population, and even on the other side of the crisis, there has been a fundamental shift in the way tenants think about health and infections risks. CRE firms are and will continue to adjust to this new reality. It raises the question of how firms acquire talent in these fields, and perhaps how they approach marketing that talent, or healthcare amenities, to customers.

“Connell Co.’s approach is a good fit for the current moment,” said Kilroy. “Hiring a specialist to be in your office is an interesting approach, but the real differentiator as workers slowly return to the office will be offering healthcare as an amenity.”

The idea is already being adapted quicker for residential settings. In Denver, a high-end wellness-focused residential project, Lakehouse, will feature a “wellness concierge” for residents, and in Miami developer CC Homes is partnering with Baptist Health’s Care to provide on-demand virtual healthcare services to a pair of new developments.

“Having a real professional at your properties is a great investment, and a cool shared asset,” Kilroy said. “In addition, it’s nice to be at arm’s length when it comes to liability.”

Connell Company has worked with Eden Health to develop reopening plans that the startup has signed off on. But Kilroy sees the idea of outsourcing and amenitizing health access to be much more palatable.

Earlier this year, a McKinsey analysis of the CRE world’s response to COVID suggested that the pandemic would create long-term behavioral changes, especially around health and wellness and perceptions around safety and work. Investments in sanitizer stations, HVAC and ventilation, and outdoor spaces will be commonplace.

“The Park hopes to make that a key selling point, installing jogging trails, outdoor workspace, playing fields and outdoor gyms as part of a push to portray their new development as a wellness campus,” Kilroy said. “The potential new clients considering space at the Park are very interested in this option.”

 

Source: Bisnow

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