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The COVID-19 Shutdown Tests Medical Office Buildings As An Investment

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As U.S. health-care systems limit medical services to emergency and urgent care situations in the face of COVID-19, medical office buildings are standing empty, and the threat of tenants missing lease payments mounts.

Still, experts say, investors have every reason to keep MOBs high on their list of sector favorites. In addition to pent-up demand, strong sector fundamentals—aging Baby Boomers, expanded medical insurance coverage, new treatment options and shifts in service delivery—are expected to aid the MOB sector’s rebound and its love affair with investors.

“Medical office buildings and other outpatient care settings have been hot commodities in commercial real estate investment for the past several years,” according to Cushman & Wakefield’s 2020 Health Care Investor Outlook released at the end of last year. “Legacy investors are doubling down on the sector, while new investors are competing for the limited product supply.”

In the meantime, medical office building owners will have to wait for tenants and their patients to return.

“Most owners are trying to not make an impulsive decision, to wait and see how this situation plays out,” said Allen Bolden, a partner with HB Medical Real Estate.

But despite the MOB market’s underlying strength, too much time may prove to be an enemy.

“The fact that we don’t know if this will last another week or several months is why we can’t give solid answers to the future,” Bolden added. “The only thing we do know is the longer the economy is shut down, the more this will test the strength of MOBs as an investment.”

 

Source: CPE

The Dallas-Fort Worth Market: When Physician Real Estate Owners Should Buy And Sell

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Dallas-Fort Worth is a unique market for physician real estate owners.

The city’s growing population affords the benefits of a primary market, allowing a practice to operate in a large medical office building in a densely populated area alongside a major freeway all while creating synergies with neighboring providers.

However, given Dallas-Fort Worth is less dense than other major metropolitan areas like San Francisco, Los Angeles, and New York, providers here have a unique opportunity.  Physician groups can actually build their own facility at a reasonable price, allowing them to offer comprehensive services under one roof, providing a more convenient and cost-effective experience for patients.

Many physicians develop their own facility because it allows them to control their destiny, manage their occupancy cost, and become a real estate investor.  Frequently, physicians focus solely on the benefits of flexibility, pride of ownership, and long-term monthly cash flow and haven’t yet determined their long-term strategy for one of their largest investments.

Over the next decade we’ll see many physicians looking towards retirement. With 43% of physicians over the age of 55, near term turnover is imminent. That number is even higher for specialist providers such as Orthopods (52%), Urologists (48%), and Ophthalmologists (48%). Considering 75% of physician-owned practices have just 1-20 providers, physician turnover can have a major impact on a practice. But what does that mean for the real estate?

For many homeowners, if you want to move, you vacate your home and likely sell it for an appreciated value. For many small business owners, you lease from a landlord and operate under a short-term lease. For many commercial business owners, even if you retire, you still maintain equity in the business, which also owns the real estate.

Physician-owned clinical real estate is different. Most commonly, the practice and real estate entities are composed of different partners. If a health system buys your practice, they have little interest in buying your real estate. If a young physician joins your practice, they may not have the financial capability or desire to buy into the real estate, especially with medical school debt at an all-time high. Unlike other businesses where retired owners maintain some equity, if a physician retires, his ownership is liquidated and redistributed to existing or incoming partners.

Let’s say you retired and still own the real estate; you’re no longer in control of your tenant. The practice may continue to operate there, but likely under a short-term lease to maintain flexibility.  If the practice vacates your building, you’re stuck trying to sell a large special-purpose facility.  Most office users don’t need a 20,000 SF facility with a large waiting area and layout suited to delivering healthcare services.

In Dallas-Fort Worth, the current average sale price for vacant medical office buildings between 10,000 and 50,000 square feet is $93 per square foot, and that’s after being on the market ten and a half months. To put this in perspective, the cost to construct a new medical office building can range between $150-$250 per square foot, and the average value of medical office properties structured as investment sales is $299 per square foot.

Based on the numbers, it’s apparent that the best time to sell your real estate is while you remain operating in it, thus positioning it as an investment sale. For owner-occupiers like physician practices, this transaction is known as a sale-leaseback. A sale-leaseback is simply a real estate sale simultaneous with executing a new long-term lease. In this type of transaction, the real estate is often sold to a 3rd party institutional investor seeking a stream of consistent rental cashflow.  Instead of paying rent to yourself, the practice now pays rent to a third-party landlord.

“Even if a real estate sale doesn’t meet your current objectives, addressing potential partnership challenges early will maximize the value and security of your investment.” points out Collin Hart, CEO & Managing Director of ERE Healthcare Real Estate Advisors.

At first, a sale-leaseback may sound similar to a reverse mortgage or a loan. While it’s not quite that, it’s certainly an alternative finance structure.  These sales are commonly used by larger corporations as a way to free up capital for investment in other areas, without carrying debt on their balance sheet. However, for many physician-owned practices, this model can be used strategically. A sale and leaseback gives physicians the ability to cash out of their real estate at a peak in the market.

At the same time, this type of sale solves challenges related to partnership structuring, recruitment, turnover, and succession planning.  With demand for healthcare real estate investments on the rise, these transactions can be structured with limited personal liability, providing flexibility for retirement during the term of the lease, without financial exposure.

Over the last few decades, owning a medical facility has given physicians flexibility; however, divesting of real estate can create opportunities for the future.

 

Source: D CEO Healthcare Magazine

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