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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

Influx Of Capital Into Medical Real Estate Creating New Competition For Established Players

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Growing demand for healthcare services has created a booming market for medical office buildings, bringing a host of new investors into the space and making it more challenging for the sector’s traditional players.

Anchor Health Properties Executive Vice President Katie Jacoby, whose company has been developing medical facilities for over 30 years, said she is seeing a surge of private equity competing for healthcare real estate deals.

“Ten years ago, healthcare was hardly even considered an asset class; now it’s one of the top asset classes,” said Jacoby, who will speak April 11 at Bisnow’s National Healthcare Mid-Atlantic event in D.C. “There is increased competition to purchase properties and to develop properties.”

Flagship Healthcare Properties Executive Vice President Gordon Soderlund, whose firm has been developing medical real estate since the 1980s, is also seeing more private equity firms and REITs making big investments in the healthcare space.

“There’s a lot of competition pursuing development,” Soderlund said. “Our returns on costs are being driven down because there are plenty of players to respond to an RFP … It’s even more competitive on the acquisition side. There’s so much capital chasing medical real estate right now.”

Nationwide transaction volume in healthcare real estate reached a new record in 2017, according to JLL’s 2018 Healthcare Real Estate Outlook, with a significant portion of the growth in the medical office building sector. The JLL report also found the sources of capital investing in medical office buildings are expanding. In 2017, 19% of MOBs were owned by private investors, 11% by REITs and the remaining 70% by healthcare providers, the traditionally dominant owners in the space.

The growing investment in medical real estate comes as the United States’ aging population is creating more demand for healthcare services. The number of people 65 years and older will nearly double by 2050, according to JLL‘s report, and those over 65 spend five times more on annual medical expenses.

“People see it as a stable asset class,” Jacoby said. “Everyone sees it . They have aging parents themselves … They can experience it on their own personal level.”

The types of tenants occupying medical office buildings is also evolving toward more stable operators, giving investors more confidence in the properties.  As recently as five years ago, the most common tenant in an MOB was a physician with a private practice in 3K SF to 5K SF.

“But individual private practices are less common today, with physicians being employed by health systems or forming groups of doctors,” Jacoby said. “A lot of these private doctors are now employed by the health system. If they’re not employed by a health system, consolidations of physician practices into larger conglomerates are allowing them to serve as anchor tenants similar to a health system.”

Soderlund also said he’s seeing physicians being acquired by health systems and consolidating to lease larger blocks of office space, a trend he views as a positive for landlords.

“One day we might be leasing office space to a six-physician practice, and once they’re acquired our lessee is now an investment-graded hospital system,” Soderland said. “From a credit perspective, that’s great. With more large tenants occupying medical office buildings, more investors are interested in buying the properties.

“Hospitals are consolidating, making them stronger, creditworthy tenants,” Jacoby said. “I think that makes it more attractive for other investors that have traditionally invested in other asset classes.”

Jacoby and Soderlund will discuss trends in the medical real estate industry April 11 at Bisnow’s full-day National Healthcare Mid-Atlantic event at the Washington Marriott Georgetown.

 

Source: Bisnow

Case For Investing In Healthcare Real Estate Remains Strong: Panel Discusses Pros And Cons Of Sector

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As brick and mortar retail stores flounder and pricing for industrial and multi-family properties continues to soar, many investors in recent years have started to look to “niche” commercial real estate (CRE) sectors to round out their portfolios.

One of the more newly discovered niche property types are medical office buildings (MOBs) and healthcare real estate (HRE) facilities, which aren’t exactly very “niche” anymore.

“It just seems like all investors are talking about these sectors now — student housing, self-storage, life science, medical —  whereas before all the news was about office, retail, multi-family and industrial,” said Elizabeth Thomas, managing director with Boston-based Bain Capital Real Estate, which is a relatively new investor in the HRE sector.

Nicholas Buss, senior director of research for Atlanta-based Invesco Real Estate (NYSE: IVZ), agreed with Ms. Thomas, adding “The firm “broke away from its shell about two years ago and started looking at sectors around the edge as well. We like the secular (non-cyclical) drivers behind medical real estate and the durability of the property type that seems to continue through economic cycles and gives us some diversification in our portfolio.”

“Even though the amount of MOB square footage, at 3 billion square feet, represents only about 5 percent of the overall commercial real estate (CRE) sector, the space is very attractive and has been the focus of many new investors in recent years,” according to Daniel Klein, senior VP of investments and deputy chief investment officer with Milwaukee-based Physicians Realty Trust (NYSE: DOC).

Mr. Klein moderated an HRE investment panel session that included Ms. Thomas and Mr. Buss at the fifth annual Revista Medical Real Estate Investment Forum, which was held Feb. 6-7 in San Diego. The session was titled “The Case for Investing in HRE” and also included as panelists Peter Martin, managing director with San Francisco-based JMP Securities, and Charles Campbell, managing partner and CEO of Charlotte, N.C.-based Flagship Healthcare Properties, which also manages a private real estate investment trust (REIT) that owns MOBs.

The focus of the panel was to hear from investors – both those who have been in the space for years as well as newcomers – as to why HRE is currently so attractive and whether it will be for the long haul. While the focus was mostly on MOBs, the panelists also talked about other HRE facility types, such as senior housing and post-acute care.

“We like the fact that the property type is not a GDP (gross domestic product) dependent property type,” Ms. Thomas noted. “We like the strength of the demographics that will depend on senior housing, and we like the fact that clinical care is migrating from the hospitals out to where the patients are. In addition, the MOB sector is not fraught with speculative development when we’re looking to invest in other sectors we really have to monitor the amount of spec development taking place.”

“JMP Securities entered the HRE space in a number of different ways, including as an investment bank providing equity growth capital for operators, and then we moved into the REITs, funding apartment REITs before moving over the healthcare REITs,” Mr. Martin told the audience. “We’ve taken a value-add approach on the investment side, as our work on the healthcare side is focused on the dislocation created by different reimbursement changes. In the last five years, we’ve been building things and selling them back to the healthcare systems, who have been slow to realize they need more outposts to service their beneficiaries.”

“The company made a commitment to HRE a decade ago and is all in, with no discussion on whether we should allocate capital to other spaces,” Mr. Campbell of Flagship Healthcare Properties said. “The company started a private REIT in recent years that is largely funded by high net-worth individuals and family offices, including some foreign investors. When we sit down with our investors, they keep coming back to us about the stability, the risk-adjusted yields and the predictability of the sector. A lot of it comes down to our access to deal flow, and in our world there is a premium to having relationships with good operators to work with. Flagship REIT is a longer-term holder of its MOB assets, and we tell our investors we say we like to own for a minimum of five years. Unless you’re a ground-up developer or a value-add buyer, that’s how you benefit from the inherent stability of the product type. And, it’s also a good way to build relationships with the health systems, as they prefer ownership stability as well.”

 

Source: HREI