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On-Campus Medical Office Pricing Now Exceeds Off-Campus Assets

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Limited availability of on-campus medical office assets has led to its pricing to uncustomarily exceed that of off-campus assets in Q1 2023 for the first time since Q1 2020, according to a report from Cushman & Wakefield.

Some are seeing the sector as a safe harbor during these challenging economic times.

Jason Anzalone, managing director of development, Cypress West Partners, tells GlobeSt.com that macroeconomic volatility has led investors to pursue safe harbor investment options.

“They have found them in on-campus medical office assets that provide immediate adjacency to acute care facilities, often have health system occupancy, and credit quality and assurances of long-tenured occupancy,” says Anzalone.

C&W’s report said that off-campus transactions have historically made up a good majority of transactions over on-campus facilities.

“With often limited land and many healthcare systems holding ownership of on-campus assets,” Cushman wrote.

Since 2020, off-campus transactions have held an average 5% premium over on-campus in terms of pricing. Occasionally, off-campus averages have fallen below that of on-campus – notably during Q1 2020 at the start of COVID-19 and now, in the preliminary values for Q1 2023, according to the report.

Average cap rates for on-campus assets have grown by 50 bps to an average of 5.5%, while off-campus has risen by 45 bps to an average of 6.5%.

“As with overall transaction volume, both on-campus and off-campus assets have dropped during the second half of 2022,” according to the report.

Volumes for both categories remained relatively strong compared to pre-pandemic historical levels during the middle two quarters last year.

On-campus transactions exceeded $800 million, while off-campus transactions were above $2.5 billion. In Q4, transactions in both categories were much more limited, with off-campus transactions falling by 50% while on-campus receded to only $696 million.

 

Source: GlobeSt.

Investor Demand For Medical Office Buildings Has Gone Global

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Demand for medical office properties is so strong, even foreign investors alien to the American healthcare system are shopping for them

“Investors from Singapore and Australia are shifting capital to the U.S. to invest in medical real estate,” CBRE Vice Chairman Lee Asher said during Bisnow’s Atlanta State of Healthcare event last week.

But as they come, Asher said he is spending more time educating foreign investors on the ins and outs of the American healthcare system.

“The foreign capital, it takes them about two years to understand how healthcare works in the U.S.,” Asher said. “There’s plenty of new capital, but the key is they need domestic operating players.”

Asher was among medical real estate experts at the event who discussed a wide range of topics affecting the industry, from the surge of new medical office construction and the merger mania occurring within the healthcare industry to the effects of the possible dismantling of Georgia’s certificate of need system.

Of course, foreign players are only a portion of the investors seeking stakes in medical office real estate. But increasing revenues, merger and acquisition activity and overall health system growth has been attracting investors from Asia, Europe, the Middle East and even Africa and Latin America, Modern Healthcare recently reported.

According to a 2019 Marcus & Millichap report, medical office sales had their largest growth in transaction velocity, at 13%, since 2015, nearly double the rate compared to other commercial property investments.

“Hospital-affiliated facilities and outpatient surgery centers with long leases and annual rent increases are most desirable, with initial returns ranging in the mid-5% to 7% span,” Marcus & Millichap officials said in the report.

Part of medical office’s attraction is its stability. Panelists said during the Great Recession, those investments largely remained untouched by the overall real estate malaise. Investors today see the sector as one of the best to weather economic downturns, especially as baby boomers age and require more healthcare.

“Also, many of the tenants — especially tenants with lots of medical equipment, like imaging groups or cancer treatment centers — book long leases and rarely, if ever, undergo the headaches of a relocation,” MB Real Estate Services Senior Vice President Brian Burks said.

Ackerman & Co. President Kris Miller said when his firm first started to develop medical office campuses more than two decades ago, it required a significant amount of personal capital and hard work to find investors. Today, the story is completely different.

“We all know racetracks make money, but it’s hard to find a banker who is going to finance one, and that was true with medical office,” Miller said. “There are just so many people who want to buy this right now. We can sell every medical office asset we stabilize, and we can sell that asset 10 times at roughly the same price.”

“Construction costs are complicating the growth of physicians and hospital groups. Even with developers willing to capitalize and build new medical facilities for tenants, the groups still need to have the financial wherewithal to handle the higher rents,” HealthAmerica Realty Group CEO Tommy Tift said. “That is probably our biggest challenge, and also that will be physicians’ … biggest challenge.”

 

Source: Bisnow

Why Medical Office Could Be The Safest Asset Class During A Recession

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The potential of a looming economic downturn has investors looking for safe places to put their money, and one top investment manager says medical office could be the best bet.

LaSalle Investment Management Head of U.S. Healthcare Real Estate Steve Bolen, speaking at Bisnow’s National Healthcare Mid-Atlantic event last week at the Washington Marriott Georgetown, said the two safest asset classes in commercial real estate are multifamily and medical office.

“Apartment owners are able to maintain occupancy during a downturn by lowering rents, and they have the flexibility to bring them back up with the economy improves,” Bolen said.

Medical office space has the benefit of being occupied by an industry, healthcare, that typically does not suffer the same job loss as other sectors during a downturn. During the Great Recession, Bolen said the overall U.S. employment base was shrinking by more than 6%, but the healthcare employment base was still able to grow by more than 2%.

“There is no better sector of our U.S. economy in terms of job growth during downturns in the economy than healthcare,” Bolen said. “Astute institutional investors have come over to medical office and view medical office as a key component of a well-diversified commercial real estate portfolio.”

Another benefit of medical office, Bolen said, is tenant retention. LaSalle has made about $2.5B of medical office investments, he said, and the overall retention rate for its medical office tenants is in the mid-80% range. In standard commercial office space, he said, retention is in the 60% to 70% range.

“So you’ve got excellent employment growth during downturns in the economy and very sticky tenants,” Bolen said. “Medical office has a lot of attributes investors view very favorably when investing for defense.”

The main challenge in investing in medical office today, Bolen said, is that so many investors are looking to put money into the asset class that there is not enough supply to satisfy the demand. The solution for this, he said, is to look in secondary and tertiary markets that investors might overlook. Medical office investors do not need to stick to the top 25 largest metropolitan areas as investors of commercial office do, he said, and they can instead find quality hospitals that create demand for medical office space in smaller markets.

“There’s just not enough to buy that’s good quality for the amount of capital that is seeking a home in this space,” Bolen said. “So you have to go where the deals are. You have to align yourselves with hospital systems in secondary and tertiary markets.”

Demand for medical office space is booming in part because health systems are moving many services away from traditional hospital campuses and into outpatient facilities. Over the last two years, the revenues that leading hospital systems make outside of the hospital have begun to equal the money they’re making inside the hospital, said Dr. Sunil Budhrani, CEO of Innovation Health, a partnership between Inova and Aetna.

“The world outside the walls of the hospital has become very important to us,” Budhrani said. “In some markets, you’ll see a reshaping toward ambulatory, outpatient [facilities] … We’re going to reshape how we’re delivering healthcare and how the hospital plays into that space.”

 

Source: Bisnow