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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.

Investors Are Flocking To MOB And HRE Space

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Currently in the growing and highly visible medical office building (MOB) space, a couple of questions seem to be garnering most of the attention.

One of those is: Will the influx of new capital, including large amounts from deep-pocketed institutional investors and investment managers, slow down in the near future?

The other is: Will capitalization (cap) rates, or first-year expected returns, stop their unprecedented compression to historic lows, even amid rising inflation and potentially higher interest rates, anytime soon?

The answers seem to be “no” and “no,” according to a panel discussion that took place at BOMA International’s 2021 Medical Office Building + Healthcare Real Estate Conference held Nov. 1-3 at the Omni Dallas Hotel.

The session was titled “The Investor Flight Toward Healthcare Real Estate” and the discussion heavily focused on growing institutional investment in the MOB and HRE space, as well as soaring pricing and falling yields for the product type.

The panelists taking part in the session included two MOB sales brokers, two healthcare real estate (HRE) specialists with institutional investment firms that are somewhat new to the space, and a Wall Street research analyst who covers public companies. They were:

■ Moderator Ben Appel, executive managing director with the Healthcare Capital Markets group of Newmark Group Inc. (Nasdaq: NMRK);
■ Mindy Berman, senior managing director and head of the healthcare capital markets platform with Jones Lang LaSalle Inc. (NYSE: JLL);
■ Vikram Malhotra, managing director and research leader for Mizuho Americas;
■ Pratik Patel, director with New York-based Wafra Inc., which in late 2020 formed a $550 million joint venture (JV) partnership with Welltower Inc. (NYSE: WELL) that entailed Wafra acquiring an 80 percent ownership in 24 MOBs; and
■ Jennifer Wong, VP of acquisitions with Boston-based AEW, which has formed partnerships with firms in the sector, including a recently formed JV with Nashville, Tenn.-based Montecito Medical Real Estate that plans to spend up to $1 billion in coming years on acquiring MOBs.

 

Source: HREI

Health Care Real Estate Could Be A Coronavirus Safe Haven

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It’s hard to imagine many stocks will do well through the coronavirus pandemic. But health care stocks and real estate investment trusts tend to be defensive sectors that investors flock to because they pay huge dividend yields.

So what happens when you combine the two?

Health care REITs might be a good bet in this scary market environment. Many are positioned well to help manage the COVID-19 coronavirus crisis, particularly companies that own and operate hospitals, medical offices and life sciences and biotech facilities.

“Health care REITs are generally the most defensive, economically resilient property type in the REIT industry,” said CFRA Research analyst Kenneth Leon in a report last week. “The group offers steady cash flow, low risk of rental rate volatility, and stable occupancy levels.”

Leon said that three in particular that he’s recommending are Alexandria Real Estate Equities (ARE), Healthcare Trust of America (HTA) and Medical Properties Trust (MPW).

Healthy Dividend Yields Are A Big Plus In Uncertain Times

The recent interest rate cut by the Federal Reserve may also help boost health care REITs — and all real estate firms — because of their solid dividend yields.

The three healthcare REITs that Leon recommends pay dividend yields ranging from 2.7% to 5%. With the Fed widely expected to slash interest rates again at its meeting next week, perhaps all the way back to 0%, the income that REITs generate will become even more tantalizing to investors flocking to safe havens.

“While COVID-19 has created near-term economic uncertainty, the REIT industry’s strong earnings, solid balance sheets, and high occupancy rates demonstrate that they are entering this situation well-positioned to handle a potential economic slowdown,” said Steven A. Wechsler, president and CEO of the Nareit trade group.

Senior Living Centers Look Risky

But not all health care real estate firms will thrive. Leon thinks investors should avoid companies that run senior living centers, because they won’t be able to safely show their properties to prospective new residents. He noted that many went into lockdown mode during the flu season of late 2017 and early 2018. And the COVID-19 outbreak is even scarier.

“Coronavirus may limit senior housing operators from showing their properties to prospective residents,” Leon wrote. “Precaution is a top priority for health care operators to better control an elevated death rate from severe flu conditions for the elderly.”

Leon remains wary of companies that operate senior housing centers, most notably Healthpeak Properties (PEAK), Ventas (VTR) and Welltower (WELL). Their rental revenue and profit growth will probably be squeezed by the admission of fewer residents.

“Operators cannot conduct visitor tours and sign up new residents.
Senior housing is in effect quarantined to new prospective residents and their families,” Leon wrote.

 

Source: CNN Business