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Medical Office Buildings Are Going Godzilla. We’re Talking Big. Really Big.

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The movie Godzilla: King of the Monsters opened May 31, with some film reviewers saying that the CG-generated “Beast from the East” seems to be getting bigger with every sequel.

The same might be said of medical office buildings (MOBs), according to a recent report from the Healthcare Capital Markets group with Chicago-based Jones Lang LaSalle.

Many healthcare real estate (HRE) professionals have recently expressed a gnawing sense that more, larger MOBs are being developed. Now, using data provided by HRE research firm Revista, JLL has verified that notion. Many MOBs are indeed becoming more Godzilla-like in size – especially those providing a wide array of services once offered only in inpatient settings.

In fact, JLL’s May 2019 Healthcare Capital Markets Perspective indicates that there are currently 44 future MOBs under construction nationwide that will be larger than 150,000 square feet.

King of the Monsters: The $375 million, 750,000 square foot David H. Koch Center for Cancer Care in New York. The outpatient facility for Memorial Sloan Kettering is slated for completion in 2019. (Rendering courtesy of Memorial Sloan Kettering Cancer Center.)

These mega MOB projects have an aggregate total of 10.9 million square feet and represent 22 percent of all of the medical office projects currently underway in the country, according to JLL. These blockbuster buildings also represent $5.3 billion of investment at an average of $480 per square foot (PSF).

With more and more healthcare services being shifted from hospitals to outpatient facilities, it would only make sense that the average size of many new, technologically advanced MOBs is becoming more monstrous. After all, with many health systems now providing a wide array of services in the MOBs they occupy — including highly sophisticated and technologically advanced surgeries and treatments, including cancer and cardiac care — many of these outpatient facilities have been dubbed “hospitals without beds.”

The new Godzilla movie has received mixed reviews, but MOBs continue to receive five-star ratings from investors. JLL notes that most of the supersized MOB projects on the list — 34 of them — are being self-developed by health systems. But, just as Godzilla prevails in the end, the same might be true for patient MOB investors if some of the projects eventually make it to the investment markets.

“Most of the health systems that are self-developing at this time are some of the best-endowed, highest rated systems with good access to capital and prolific donor bases,” JLL notes. “Certainly, as credit cycles and capital markets change, these outpatient facilities would be ideal targets for monetization and would be desirable investments for the most qualified institutional investors.”

 

Source: HREI

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