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How ASCs Play A Role In Medical Office Transactions — 3 Insights From An Investment Director

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An influx of medical office investors is good news for ASC operators, according to John Nero, a director of the healthcare-focused investment banking firm Hammond Hanlon Camp.

Mr. Nero told Becker’s ASC Review how ASCs could be affected by medical office transactions — and play a role in them.

Question: What should ASC operators know about the medical office building market and activity right now?

John Nero: The medical office market continues to see an influx of new capital providers regularly, including private equity, institutional and offshore capital. These investors continue to create a market imbalance where capital outweighs the supply of quality medical office and ASC product, which bodes well for ASC operators that own their facilities and may want to evaluate opportunities to partner or sell in a favorable market environment.

Question: Every week, there are new transactions involving medical office buildings that have ASCs. Why do you think we see these kinds of facilities changing hands? Is it normal or noteworthy?

John Nero: Medical office buildings with ASCs tend to be viewed favorably, particularly when dealing with facilities located within certificate of need states, where the ability for the tenant to move the ASC is limited and the development of new competitive product is often restricted. While ASCs are specialized uses that cost a landlord more tenant improvement dollars compared with a more traditional medical office user, they also generate higher rents and have higher renewal probabilities upon lease expiration. Having an ASC in a multi-tenant building may also help attract physicians who perform cases to lease their office space there.

Question: What do medical office building operators prioritize when selecting a strategic capital partner?

John Nero: The top three factors medical office building operators look for when selecting a strategic capital partner are:

1. Alignment On Scale Expectations —This may be the most important element of creating a successful joint-venture partnership within any real estate sector, but in healthcare, it is particularly important. Some institutional capital providers can have unrealistic expectations of scale and capital deployment in this space. Most operating partners want to align with capital partners that are fairly well-educated on the nuances of the outpatient facilities sector, so that both sides understand what level of scale is realistic within the established investment strategy and defined timeframe.
2. Competitive Advantage — Every investor is seeking a competitive advantage, and this goes for both operators and capital providers. Operators are obviously looking for competitive economics in their joint-venture structures, whether it’s a favorable promote structure or eliminating requirements on crossing multiple investments within a program. They may also seek a sourcing advantage from their capital, as many private equity capital providers also have strategic investments in healthcare operating businesses (such as ASCs) that may surface off-market real estate opportunities.
3. Speed And Efficiency — Most medical office building operators see a tremendous amount of deals on a regular basis. As such, they need to be aligned with a capital partner that can respond quickly on whether or not to pursue opportunities in today’s competitive marketplace. The old mantra that “A fast ‘no’ is the next best answer to a ‘yes'” rings true here. Most new arrangements we’re advising on have some type of “three strikes” policy, whereby the capital partner can decline up to three opportunities that fit predefined criteria before the operator can pursue the transaction through another capital vehicle.

 

Source: Becker’s ASC Review

Why Medical Office Could Be The Safest Asset Class During A Recession

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The potential of a looming economic downturn has investors looking for safe places to put their money, and one top investment manager says medical office could be the best bet.

LaSalle Investment Management Head of U.S. Healthcare Real Estate Steve Bolen, speaking at Bisnow’s National Healthcare Mid-Atlantic event last week at the Washington Marriott Georgetown, said the two safest asset classes in commercial real estate are multifamily and medical office.

“Apartment owners are able to maintain occupancy during a downturn by lowering rents, and they have the flexibility to bring them back up with the economy improves,” Bolen said.

Medical office space has the benefit of being occupied by an industry, healthcare, that typically does not suffer the same job loss as other sectors during a downturn. During the Great Recession, Bolen said the overall U.S. employment base was shrinking by more than 6%, but the healthcare employment base was still able to grow by more than 2%.

“There is no better sector of our U.S. economy in terms of job growth during downturns in the economy than healthcare,” Bolen said. “Astute institutional investors have come over to medical office and view medical office as a key component of a well-diversified commercial real estate portfolio.”

Another benefit of medical office, Bolen said, is tenant retention. LaSalle has made about $2.5B of medical office investments, he said, and the overall retention rate for its medical office tenants is in the mid-80% range. In standard commercial office space, he said, retention is in the 60% to 70% range.

“So you’ve got excellent employment growth during downturns in the economy and very sticky tenants,” Bolen said. “Medical office has a lot of attributes investors view very favorably when investing for defense.”

The main challenge in investing in medical office today, Bolen said, is that so many investors are looking to put money into the asset class that there is not enough supply to satisfy the demand. The solution for this, he said, is to look in secondary and tertiary markets that investors might overlook. Medical office investors do not need to stick to the top 25 largest metropolitan areas as investors of commercial office do, he said, and they can instead find quality hospitals that create demand for medical office space in smaller markets.

“There’s just not enough to buy that’s good quality for the amount of capital that is seeking a home in this space,” Bolen said. “So you have to go where the deals are. You have to align yourselves with hospital systems in secondary and tertiary markets.”

Demand for medical office space is booming in part because health systems are moving many services away from traditional hospital campuses and into outpatient facilities. Over the last two years, the revenues that leading hospital systems make outside of the hospital have begun to equal the money they’re making inside the hospital, said Dr. Sunil Budhrani, CEO of Innovation Health, a partnership between Inova and Aetna.

“The world outside the walls of the hospital has become very important to us,” Budhrani said. “In some markets, you’ll see a reshaping toward ambulatory, outpatient [facilities] … We’re going to reshape how we’re delivering healthcare and how the hospital plays into that space.”

 

Source: Bisnow

The Top Markets for Medical Office Buildings

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The medical office building sector is considered one of the safest in commercial real estate investments due to, among other factors, a national trend to lower healthcare property operating costs.

“MOBs are a lot more efficient to run, cheaper to operate and are usually leased on a triple net basis which is attractive to investors,” Rodman Schley, senior managing director of BBG tells GlobeSt.com.

According to a recently released report by BBG, between 2005 to 2016 MOBs rose by approximately 50% to about 41,000 nationwide.

“Houston, Minneapolis/St. Paul, Boston, Atlanta and Chicago have the largest concentration of MOB construction projects. Nationally, the MOB market accounted for an estimated 22 million square feet in 2018,” Schley says.

The Dallas/Fort Worth area had the nation’s highest number of MOB construction completions from the third quarter of 2017 to the second quarter in 2018, according to the report.

“The region had nearly one million square feet of medical office space added during this period,” Schley tells GlobeSt.com.

Besides lower operating costs, the increased demand for medical office buildings can be attributed to growing investor interest, convenience and technology, the overall pursuit of a healthier lifestyle, changes in reimbursement and regulations and the aging population’s need for medical care.

The average asking rental price for MOBs rose to nearly $23 per square foot, a 1.4% increase year-to-year. This is due to an increasing demand for the limited supplies of high quality, newly constructed, medical office space and other outpatient facilities.

“The rate of construction and the renovation of MOBs will continue growing,” predicts Schley. “It’s definitely a strong MOB market. We have a lot of baby boomers and they have medical needs. We’ve also become much more health conscious as a society. We are certainly not at an over saturation point in the MOB sector.”

 

Source: GlobeSt.