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Borrowers And Lenders Are Adapting To The Hot Heathcare Real Estate Market

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When it comes to financing medical office building (MOB) acquisitions, the cost of capital is not always the most important factor in choosing a lender.

“In fact, when a nine-property MOB portfolio in the Atlanta area changed hands in a sale-leaseback transaction in late 2019, the borrower on the $25 million loan chose to go with a lender that did not have the lowest cost but that knew the tenant best so that they could make sure that everything would go quickly through due diligence and get to closing and not hit any bumps along the way,” said Sabrina Solomiany, a first VP, US Healthcare Capital Markets Debt & Structured Finance with CBRE Group Inc. (NYSE: CBRE), who helped line up the debt for the buyer. “It was very competitive, but ultimately we went with Synovus, with part of the reason being that even though they did not necessarily have the most competitive terms, they actually had a banking relationship with the physician group.”

Ms. Solomiany made her remarks during the recent Revista Medical Real Estate Investment Forum 2020, held Jan. 27-29 at PGA National Resort & Spa in Palm Beach Gardens, Florida. She was part of a panel session titled, “Debt Outside the Box: Construction, Mezz & Alternative Asset Classes.” Joining Ms. Solomiany on the panel were: Natalie Sproull, VP with Capital One (NYSE: COF), as moderator; Jim Barnes, director of Healthcare Specialty Lending with Synovus Financial Corp. (NYSE: SNV); and Andrew Smith, managing director with Los Angeles-based Kayne Anderson Capital Advisors LP.

During the session, the panelists discussed some of the latest trends in healthcare real estate (HRE) financing when it comes to acquisitions as well as development deals. Part of the discussion focused on how and why certain HRE deals get done.

“When it comes to construction financing of medical projects, people are often surprised that the first few things I consider are not always financial in nature, said Mr. Barnes of Columbus, Ga.-based Synovous. “I like to look more at the expertise of the developer,” he said, “making sure that the developer really has a deep experience in delivering medical properties on time and within budget. This has become much more important recently with the trend toward greater institutional equity investment and, for the most part, the institutional investors having much less expertise in construction than the developers. Secondly, the firm looks for strong sponsorship either from a hospital system or a longstanding, stabilized private practice – something that will create an anchor within the property.”

 

Source: HREI

2019 Medical Office Building Transaction Volumes 50% Higher Than Pre-Recession

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Increasing interest from institutional investors has helped to push the medical office sector to hefty transaction volumes and steady occupancy despite record construction in the second quarter.

A new report from CBRE notes that US transaction volumes this year for medical office properties are 50% higher than their pre-recession levels. Meanwhile, medical-office capitalization rates – a measure of a property’s income as a percentage of its price – have pulled even with those of conventional offices after years of registering higher.

Much of the market’s momentum comes from demographic trends toward longer lifespans and more healthcare consumption as well as a medical-industry shift toward more outpatient care. CBRE defines medical offices as office buildings in which at least half of leasable space is occupied by medical uses such as dental, surgical or special practitioners and services.

GlobeSt.com caught up with Ian Anderson, CBRE’s head of Americas Office Research, for an exclusive interview about the report’s findings on the medical office sector. Here are excerpts from that conversation.

GlobeSt.com: What about the medical office sector is most appealing to institutional investors and why are they jumping into the sector now rather than years earlier?

Ian Anderson: Medical office buildings have been an attractive target for institutional investors for many years, but this current cycle has been unique in accelerating that trend. The current expansion has seen a dramatic transformation in the way commercial real estate is being used, and that sometimes has negatively affected demand for space. That’s particular true for conventional offices, for which demand is influenced by workplace strategies and densification, and for retail space, which is adapting to e-commerce. As a result, many institutional investors have been forced to seek new opportunities that offer attractive returns. This has caused a surge of interest into alternative commercial real estate investments where growth is more robust, such as life sciences lab space, self-storage, and co-living, among others.

Aside from the ‘push’ by investors into emerging, alternative commercial real estate investments, the ‘pull’ of deeply entrenched and highly attractive demand drivers is what is really driving demand for medical office space. Any investor seeking to capitalize on the demographic and consumption trends unfolding in the United States wants to have a position in medical offices. Underlying these megatrends, though, is the continued shift by healthcare systems to provide services in a lower cost setting that is more convenient to the consumer. In other words, allowing consumers to obtain healthcare services near to their home, rather than venturing to the main hospital of a healthcare system. Finally, though, medical office investment is driven by the income derived from these properties, which are frequently supported by a variety of tenants with abundant demand and a reluctance to move upon the expiration of their lease.

GlobeSt.com: What has fueled demand for medical office space in markets where it is strongest, namely Chicago, Atlanta, New Jersey and Nashville?

Ian Anerson: Demand for medical office space varies from market to market due to several reasons. In some instances, we observe higher net absorption – demand – simply as a result of the delivery of new medical office buildings in markets where it is easier to build. For example, there are more medical offices under construction and waiting to be occupied in the Inland Empire than Los Angeles, where it is more difficult to build. In other instances, there are local trends in the healthcare industry, such as a merger between healthcare systems, that may affect demand for space. But generally speaking, higher demand for medical office space by market results from a combination of favorable demographics, either in the form of a growing total population or an existing, abundant elderly population, supported by attractive and growing incomes.

GlobeSt.com: Given the strong trends driving the sector, why aren’t we seeing more construction of medical office buildings? Does the pipeline include more deliveries on par with the record set in this year’s second quarter?

Ian Anderson: Like most types of commercial real estate today, construction of medical offices has remained in check with demand. Not surprisingly, the vacancy rate of US medical offices hasn’t budged by more than 20 basis points in the last two years. In the second half of 2018, we saw construction volume of medical offices drop significantly, which should help boost rent growth for investors in the near-term. Then construction activity picked up in 2019 to levels consistent with the average since 2010, but still well-below the peak of construction in 2016.

 

Source: GlobeSt

Healthcare Real Estate Gains Steam As Possible Downturn Nears

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Professionals involved in owning, developing, leasing or financing medical office buildings (MOBs) often point to the Great Recession as an instigator for new investors to become interested in the property type.

To be sure, the healthcare real estate (HRE) space and MOB development and investment certainly suffered during the big downturn of 2007-09. However, thanks to other, unrelated circumstances, existing properties performed well, retaining their physician and health system tenants and, as a result, maintaining their values.

With many economic and business pundits predicting that the country’s economy is once again heading toward a  downturn – albeit not as severe as the last one – the recession-resistant qualities of MOBs are once again piquing the interest of a wide range of would-be investors as well as providing a sense of comfort for those already involved.

A panel of well-known, experienced HRE professionals recently explored this topic, as well as a host of others, while discussing the short- and long-term outlook for the sector during a panel session at the recent InterFace Healthcare Real Estate Conference in Dallas. The panel, titled “What is the Short- and Long-Term Outlook for Healthcare Real Estate?” was moderated by Murray W. Wolf, publisher of Healthcare Real Estate Insights.

The panelists comprised: Lee Asher, vice chairman of the U.S. Healthcare Capital Markets team with CBRE Group Inc.; John Pollock, CEO of San Ramon, Calif.-based Meridian; Gordon Soderlund, executive VP, strategic relationships with Charlotte, N.C.-based Flagship Healthcare Properties; Jonathan L. “John” Winer, senior managing director and chief investment officer with White Plains, N.Y.-based Seavest Healthcare Properties; and Erik Tellefson, managing director with Capital One Healthcare Financial Services.

As the session kicked off the conference on Sept. 17, one of the panelists, Mr. Winer of Seavest, said that during “recessions, healthcare facilities, in particular those with the characteristics that we all know about, do just fine.” But he added that if there is a caveat to that perspective. If a recession is indeed eminent, he cautioned, investors should make sure not to acquire assets with only short-term prospects for success, be they aging buildings and/or those that will not provide flexibility as the healthcare delivery model changes in the future.

“The assets most of us are going to be looking for are newer assets that we’re very comfortable with as a long-term hold; we’re not looking for short-term turnaround plays,” Mr. Winer said. “But otherwise, I think we’re in good shape and I think businesses (in this sector) are in good shape, whether a downturn occurs or not.”

Other Panelists Agreed

“We operate a private REIT (real estate investment trust),” said Mr. Soderlund of Flagship, “and so we have a very long-term view of holding assets, and we are becoming more aggressive, reasonably aggressive in pursuing acquisitions. We want to build our portfolio and we … figure out what we should (hold on to and) not hold on to. We’ve been through that process. There’s a continuing imbalance of supply and demand, and until that changes, and until interest rates maybe go in a different direction, we’re all in a relatively safe place right now.”

Mr. Pollock of Meridian, which often redevelops value-add medical facilities, noted that during a recent meeting with investors from various sectors of commercial real estate, he was “peppered” with questions about HRE.

When he told that group that the tenant retention rate in medical facilities is often in the 85 percent to 90 percent range, “they were like, ‘You’re kidding!’” Mr. Pollock said.

“In general office, it’s 70 percent across the board,” Pollack said. “I think what we’re all seeing is that investors who are in industrial, multifamily and office are now asking more about healthcare. So we’re seeing pension funds that haven’t been in the sector, institutional investors who haven’t been allocating to the space with the theme being that medical office assets are performing better and they’re readying, maybe not for an economic downtown, but toward diversifying their investor base,”

 

Source: HREI