Medical Outpatient Buildings Are A Good Segment For CRE
There are certain specialties in particular helping to drive outpatient treatment in dedicated real estate.
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‘Medtail’ Is Making Its Name In North Texas
Changing consumer and practitioner mindsets are aligning with landowners to bring more healthcare tenants to the retail space.
So-called “medtail” is a growing trend in North Texas, in part due to hospital systems and real estate brokers both transitioning new developments away from large community hospitals and stand-alone healthcare buildings and into pared-down medical centers and retail locations.
The rise of medtail accompanies the growth of online shopping, decreasing the need for brick and mortar retail locations for consumer goods. But most healthcare services can’t be done online, making them great candidates for retail locations to drive foot traffic in a development.
Dallas-based Northwood Retail, which operates the Shops at Park Lane, has been at the forefront of this trend, signing retail leases with seven healthcare providers and nine wellness locations last year.
Retail is less about soft good clients, says Northwood President Ward Kampf, and much of that is due to a perfect storm of demographic changes. Aging baby boomers are in greater need of healthcare facilities, and younger Millennials and Gen Z consumers bring a heightened awareness of health and wellness to their discretionary income. While the older generation is looking to slow the aging process, social media growth means that young people today have more eyes on them than past generations. They want to look healthy and beautiful on camera, leading to a focus on health and wellness.
Consumers want convenience as well. Medtail allows them to get in and out quickly and avoid large medical centers and shopping malls with inconvenient parking. Ferrari Orthodontics in Lakewood and Westlake Dermatology across the street from SMU are new examples of health and beauty retail developments reflecting demographic shifts.
“Kids today are more aware of appearances,” Kampf says. “These businesses play to younger consumers.”
The growth of urgent care has been a beneficiary of this growing trend in North Texas. Children’s Health, Baylor Scott and White Health, Texas Health, and Medical City Healthcare all have their own outpatient urgent and primary care brands, which can be found in retail locations around DFW. Urgent care is meant to be convenient and efficient, and retail makes excellent sense for patients.
“As you look at the expansion of facilities, and what types of facilities we talk, the retailization of healthcare is about really two things: visibility of the brand and accessibility for the patients,” says Ethan Garner, senior vice president for JLL.
Foot traffic is an integral part of the equation too. Because of how we consume healthcare today, health and wellness locations can be significant drivers for shopping centers, so landowners are tapping health, wellness, and dental locations to fill empty retail space. Retail giants CVS and Walgreens have also launched their own health clinics, adding more providers to retail developments.
“Mindsets are changing,” Kampf says. “A doctor can drive traffic. People are asking, ‘Does it fit?’”
Concierge medical practices are another model that lends itself well to retail, and their growth has been a driver of the medtail trend. Administrative hassles and shrinking reimbursement rates have led many physicians to strike out independently and operate outside of the health insurance market. These physicians don’t want to retire but are tired of dealing with red tape, and if they can attract enough well-off patients, it can be lucrative.
“Doctors want to do their own thing and to get their own clientele,” Kampf says. “For families and older people, they want that ability or access 24/7 because they know they’re getting older, and they want quick access.”
Highland Park Village, one of the state’s most luxurious retail spaces (and its first), is not immune to the trend. Dr. Barbara Sturm recently opened a med spa offering wellness and skin care services. A generation ago, it would have been outlandish to find a physician’s office in between Prada and Gucci, but healthcare is increasingly seen as a prestige tenant.
“They’re going to be careful that their strip center is not going to get run down or have a vape shop next to them,” says Thomas Allen, CEO of Practice Real Estate. “They’re going to pay the rents to get the nice centers.”
Both luxury and mid-level retail landowners continue to see healthcare as an asset rather than an option of last resort because of the way we consume healthcare today.
“This is for all spectrums. Whether it’s the highest-end center or it’s about convenience, people want these services to be part of the retail mix,” Kampf says. “People want retail presence, footsteps, and awareness.”
Source: D CEO Magazine
Cap Rates On The Rise For Net-Leased Medical Market
Medical uses continue to migrate away from their traditional homes on hospital campuses to retail-oriented sites.
Even as they are overshadowed by non-investment grade property volume, this “medtail” trend is growing in popularity among investors, sending cap rates up.
Year-over-year cap rates on single-tenant, net-leased medical properties were up by 22 basis points at the end of Q3 2018, according to a new report issued by The Boulder Group, a boutique real estate investment firm specializing in net lease property investments. The report, which looked at medical properties priced below $10 million, indicates that the third quarter 2018 cap rate was at 6.47 percent, versus 6.25 percent in the third quarter 2017.
“The increase in cap rates can be attributed to a higher concentration of properties located in secondary markets as well as the high percentage of non-investment grade tenants within the net lease medical sector,” said Randy Blankstein, president and founder of The Boulder Group.
These are favorable cap rates compared to the overall net lease market, though the year-over-year spread has slightly expanded. The current cap rate for general net lease properties is 6.38 percent, 9 basis points lower than net lease medical properties. This time last year, the spread was 5 basis points when the overall net lease cap rate was 6.20 percent versus 6.25 percent for medtail.
With a 6 percent cap rate and accounting for more than 55 percent of the supply for the overall net lease medical sector, dialysis-related properties are clearly the most attractive to investors. Newly constructed properties, and those with at least 11 years of remaining lease term, were even lower with asking cap rates of 5.85 percent, compared to 6.47 percent for all medical properties.
The sector is dominated by properties leased to Fresenius Medical Care and DaVita Kidney Care, two well-established, high-credit operators in the space. A Hammond, Indiana DaVita dialysis center sold in an all-cash transaction last month for $2.2 million. In a separate transaction, a DaVita-tenanted property in South Holland, Illinois sold for $3.7 million and a cap rate of 6.03 percent.
According to Blankstein, net lease medical properties typically provide rental escalations throughout the term of their lease, providing investors with an inflationary hedge and a balance to rising interest rates. Additional long-term factors that make medtail properties appealing include the general marketability and attractiveness of properties that are located within a retail corridor.
“The increasing popularity, demonstrated by sales volume and cap rate movement, is due to a variety of immediate and long-term factors,” said Blankstein. “The medical sector, and the specialized services it provides, is widely seen as e-commerce resistant.”
As popular as this sector has become, not all offerings have the same appeal. In the third quarter of 2018, 75 percent of the medical sector consisted of non-investment-grade tenants. Further, there are a considerable number of properties in secondary and tertiary markets. And, as demonstrated by asking cap rates, there is considerable disparity among the varying categories of net lease medical properties with dialysis properties having the lowest at 6 percent and urgent care facilities witnessing the highest cap rate at 7.3 percent.
In looking ahead, through the balance of 2018 and into 2019, Blankstein predicts that the single-tenant net lease medical sector will remain active as the long-term outlook for healthcare-related properties attracts investors.
“Resistance to e-commerce and the country’s aging demographic will keep investor demand strong in the net lease sector,” Blankstein said. “Investors across all profile types will continue to acquire single-tenant medical properties as cap rates remain attractive when compared to the overall net lease sector.”
Around the country, the Midwest’s median asking cap rate of 6.5 percent lags only the Northeast’s 6.6 percent. The South had a net lease medical property median asking cap rate of 6 percent in the third quarter while in the West, asking cap rates averaged 5.5 percent.
Source: REJournals
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