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Suburban Medical Office Pricing Is At A Premium

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As investors moved toward real estate sectors with better growth opportunities, they turned towards the medical office sector.

Now pricing is at a premium relative to suburban offices, according to an analysis by Real Capital Analytics.

From Q1 2016 to Q1 2021, medical office cap rates averaged 20 basis points (bps) lower than suburban offices. However, in Q1 2021, that spread increased 25 bps, as medical office properties had a 6.5% cap rate across the US.

Suburban office and medical office haven’t always diverged. For example, from 2002 to 2015, there was no discernable spread between cap rates for suburban offices and medical office buildings, according to RCA.

Not surprisingly, prices for medical offices have also held up better than suburban offices through the pandemic. While RCA CPPI for suburban offices declined at a 0.7% year-over-year pace into Q3 2020, it posted a 2.7% pace of growth into Q1 2021.

For medical offices, the volatility wasn’t as great. The RCA CPPI for medical offices hit a low of 2.5% annual growth into Q3 2020 but stood at a 2.8% pace by Q1 2021.

“The investors have been more optimistic about the medical office sector, understanding that an aging population requires more medical intervention,” according to RCA’s Jim Costello.

Medical office deal volume was also more robust through the pandemic. In Q1 2020, medical office deal volume fell only 41% year-over-year. By comparison, suburban offices suffered a 64% decline.

While suburban office may not fare as well against medical office, it has outperformed urban office. Its growth accelerated to a 3.6% annual pace in March, while urban assets declined by 2.4% year-over-year, reflecting a continuing trend of suburban outperformance in the sector, according to a separate analysis from Real Capital Analytics.

 

Source: GlobeSt

Medical Office Building Sales Fell Nearly 50 Percent In Q2, But The Sector’s Outlook Is Strong

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The volume of MOB investment sales transactions in the second quarter of 2020 totaled around $2.2 billion, a 43 percent decrease compared to a year ago. In the first quarter of 2020, MOB investment sales volume reached $3.7 billion, according to data firm Real Capital Analytics (RCA).

The CoStar Group, another provider of commercial real estate data, pegs MOB investment sales volume at around $2.1 billion in the second quarter, a drop of 54 percent from $4.7 billion from a year ago.

“The volume of sales has absolutely hit pause, it hit the brakes really hard in the second quarter. You saw a significant drop in sales volume,” says Keith Pierce, research manager for Southeastern region with real estate services firm Transwestern. “The price per square foot did not really shift that much for those sales that did close. But by and large, just everybody froze in late March and largely stayed frozen until sometime in June.”

Average cap rates on transactions involving MOB assets remained at 6.6 percent at the end of the second quarter, flat with the figure from a year ago and the first quarter of 2020, according to RCA. CoStar pegs average MOB cap rates at 6.7 percent, also registering no change from the previous quarter.

“I anticipate seeing somewhat of a flattening,” says Russell Brenner, president of the medical office and life sciences division with real estate investment firm CA. “Once the market truly opens up again and lenders, which have been very selective in where they lend, come back into the market in droves and in a more significant way, I think you may well see cap rates continue to fall. But for probably the next two three quarters, I think it will be a largely flattening of cap rates.”

Earlier during the pandemic, many Americans largely postponed elective procedures, which put a dent on revenues for medical office tenants. But in states where those facilities are reopening, industry sources are reporting pent-up demand.

“We saw very few delinquencies, perhaps a handful of rent deferral requests, but by and large, the healthcare medical office tenancy as a whole stood up very well,” says Brenner. “Certainly now that elective procedures are back on in most parts of the country, MOBs are poised to bounce back and will continue to be a stable and reliable asset class.”

“Medical practices are running at 90 to 95 percent of pre-pandemic levels,” says Steve Hall, senior managing director for healthcare advisory services at Transwestern, who expects this level of demand to continue through the end of the year.

“Many of the company’s tenants are back to 80 percent of pre-pandemic levels of procedures and services,” says Jon Boley, senior vice president of acquisitions and development for HSA PrimeCare, a firm that develops, leases and manages medical facilities.

“The reason these businesses are not back to 100 percent is because they are having to do above-standard cleaning in order to disinfect surgery centers throughout the day,” Hall notes. “A factor that will shore up MOB assets in the future is the dearth of new construction happening right now. During a pandemic, a lot of people aren’t pulling the trigger on a brand new construction. The lack of construction going on right now I think is really going to keep the market strong since there is not going to be oversupply.”

 

Source: HREI

Healthcare Real Estate Developers Are Adapting To A Changing Landscape

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Anyone who has kept an eye on the healthcare real estate sector over the past several years is aware of the property type’s reliability amidst increasing economic uncertainty, which has resulted in growing interest among investors.

However, for what has become one of the hottest investment sectors in recent years, transformations underway within the healthcare industry will bring changes to the asset class over the next decade.

The market fundamentals are easy to understand. According to a recent report from Real Capital Analytics, United States-based healthcare real estate assets account for over $1 trillion in market value. Physician visits by baby boomers are expected to nearly double in the next decade; it is also projected that by 2060, one in four people will be over 65 years old. These factors make it clear that this already large market is positioned for continued growth.

However, in crowded regional healthcare markets like Philadelphia, which features several large competing healthcare systems and a variety of growing specialty networks, that growth will not just be more of the same.

Changes in Delivery

Traditionally, the American healthcare delivery model centered on hospitals, which meant that medical office buildings tended to be clustered near hospitals and other large inpatient medical facilities. These facilities were easy for doctors to access and provided enhanced services close to individuals’ primary points of care.

In recent years, the healthcare delivery model has undergone a dramatic shift, with outpatient and ambulatory facilities becoming primary points of care. This trend has unfolded almost simultaneously with the wave of consolidations and mergers that has swept through the industry in the last decade.

Working in tandem, these two trends have created a healthcare industry that is dominated by large healthcare systems searching for enhanced geographical footprints to better and more conveniently meet the health and wellness needs of the populations and communities they serve.

Key User Demands

Real estate plays a key role in a healthcare system’s ability to make quality care more accessible. As such, the demand for well-located, quality space continues to rise, attracting a greater number of investors than in prior years

Although location still plays a vital role in healthcare real estate investment, the criteria behind what makes a location desirable has shifted. Since medical buildings no longer need to be immediately proximate to hospitals, today’s best locations are those where people already are living, shopping and working. Whether this comes in the form of a purpose-built medical office building in the heart of a growing community or a retail location next to popular cafés and shopping destinations, today’s healthcare consumers prioritize convenience above all else.

Visibility is also playing a larger role in site selection for new healthcare projects. Expanding networks want their names out in the market, and they want people to be aware of their presence in the local community. This “retailization” of healthcare is highlighted by many medical office tenants’ requirements for signage and high visibility in their search for space.

Flexibility is also a main factor in today’s marketplace. Physician groups and healthcare systems require spaces that can accommodate the shifts in how care is delivered while also provide the flexibility to cater to telemedicine and other technologies that are transforming how people access care.

Project Example

Just outside of Philadelphia in Washington Township, New Jersey, the 35-acre Washington Square Town Center development addresses all of the factors discussed above.. With an increasingly cross-generational population and changing delivery model, medical space was a key component to the mixed-use project.

Working closely with Rothman Orthopaedic Institute, one of the region’s largest independent orthopaedic practices, a 40,000-square-foot, state-of-the-art medical office building was created at the gateway to the community that includes multifamily housing and retail options.

The healthcare trend has even been extended to the project’s residential component, with a 110-bed assisted living facility currently under construction to join the 330 residential apartments and 100 townhomes on the property. Today, the Rothman Medical Building stands fully occupied, and the retail component has seen tremendous interest from both medical and traditional retail tenants.

Not only do projects like the Washington Square Town Center allow the community to enjoy increased access to diverse medical services in a variety of settings, they also provide growing regional networks with a highly visible footprint in new communities to foster their continued growth.

Looking to the next decade, the healthcare real estate industry is positioned for tremendous growth. Leading this growth will be the developers and investors who truly understand the needs of an increasingly consolidated healthcare industry and can creatively imagine projects to meet both its short- and long-term needs.

 

Source: REBusiness Online