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Medical Office Buildings Continue To Stoke Net Lease Investors’ Interest

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Medical office buildings have emerged as a favorite among investors interested in single-tenant net lease opportunities, according to a new report from Colliers.

Overall, the STNL space posted strong performance in the first half of 2022 and hit a historic high of $40.1 billion in investment sales, according Colliers. However, volume in Q2 fell 35% over Q1 numbers and 17% year-over-year.

Despite that, the medical sub-sector remains strong. Colliers’ Jay Patel cites as one reason “predictable” cash flows and the price range on assets that appeals to both institutional and private investors alike. In addition, there’s COVID-19:

“Pandemic investors flocked to the medical office sector for its perception as a safe, interest- resistant and now pandemic-resistant asset,” Patel says. “During the pandemic, investors were eager to snatch up anything medical-related regardless of lease term, credit, and location.”

Construction pipeline delays have also contributed to an ongoing chasm between supply and demand, which has compressed cap rates.

“Net lease has also risen due to the ongoing supply chain disruptions, slowing the delivery of new product,” Patel says. “This has pushed more healthcare tenants to consider alternative space solutions like the adaptive reuse of traditional office or retail properties.”

Of course, the capital markets have changed this year — and medical office isn’t immune to those shifts. Patel notes that “while capital is still being deployed, investors are no longer scooping up just anything that’s healthcare assets.”

“Buyers are now taking a closer look at credit, lease terms and location. With inflation looming in everyone’s mind, assets that have strong rent increases are experiencing stronger activity,” Patel says. “To bridge the gap for investors that are feeling the burden of this rising interest rate environment, many developers and sellers are starting to shift pricing, which is creeping back toward pre-pandemic standards.

Colliers Julie A. Johnson predicts the asset class will continue to be strong in the near future despite rising capital costs.

“The past several years have been banner years for investors with historically low cap rates and many more buyers in the market than sellers,” Johnson told GlobeSt.com in an earlier interview. But “medical office buildings will continue to be strong with not only the increase of the senior population but also the population increase in many markets, specifically the Sun Belt cities.”

Patel says good lease terms and credit will be critical moving forward into 2023. While previously just one of those elements was needed to sell a property.

“Today’s market conditions necessitate all three factors carrying equal importance when appealing to investors,” Patel says.

 

Source: GlobeSt.

South Florida Is Changing, And So Is Healthcare Construction

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As people flock to South Florida, demand is rising for new construction in housing, transportation and healthcare.

But in the face of supply chain challenges, escalating prices and a tight labor market, experts in the field believe the success of new projects hinges more than ever on timely decisions and collaboration.

“There’s been a 180-degree shift over the past few years,” says Operations Manager Johnathan Peavy at Robins & Morton’s Miami office. “In the early days of the pandemic, supplies, material and even labor were readily available. We anticipated some supply chain issues due to the pandemic, but no one anticipated the ‘Texas Freeze,‘ which compounded the supply chain woes. Along with secondary shutdowns to heavy manufacturing markets, these have created a title wave of supply chain issues.”

Staggered factory shutdowns have left lingering backlogs of construction supplies, from electrical components to building materials. The problems are compounded by the ongoing supply chain issues and a very tight construction labor market, with cost escalations increasing budget volatility.

At Robins & Morton, supporting clients in a changing market is a top priority – and that process starts on day one with a commitment to transparency and collaboration.

“We want to be available to help every step of the way; not only in building, but in budgeting, scheduling, procurement and approval,” says Peavy. “Making smart choices about which materials to use and when to order them. Or helping the client plan for volatility in the market – for example, carrying over a percentage of the budget each month to be ready for inflation or price hikes.”

The firm’s collaborative approach serves as an essential strategy when the company faces uniquely challenging projects – such as rebuilding Baptist Health Fishermen’s Community Hospital in Marathon. That same strong communication is key to overcoming market challenges at Robins & Morton’s projects across South Florida, including Jupiter Medical Center’s Surgical Institute Expansion, BHSF Boca Raton Regional Hospital and University of Miami Health System.

“There’s no one-size-fits-all solution,” adds Senior Project Manager Edwige Clark. “It’s about looking at the data you have and trying to spot risks and potential pitfalls before they happen – but the more you can communicate, the more effective all parties can be. We’re navigating this together.”

Those close partnerships help futureproof healthcare facilities. Often, that starts with designs that can significantly reduce the environmental footprint and utility costs. For tropical and coastal environments like South Florida, structures need to withstand humid environments, heavy winds, and potential flooding, and hospitals must remain operational to serve patients during hurricanes or other natural disasters.

“At the end of the day, we’re doing more than meeting parameters. We’re building for people: for healthcare workers, for expecting parents, for folks recovering from illness or injury,” says Clark. “When the construction is finished; it’s in the choices we made that will impact those people for a long time.”

As flexibility in work and transportation allows people to move “where they want to live” and not only “where they need to live,” South Florida is a key destination. An influx of new residents will fuel growth and new developments, which will include healthcare facilities to serve the growing population.

“If so, South Florida will be ready,” says Peavy. “Over the next three to five years, it’s likely the region will continue to grow – and with it, the cycle of new construction. But we’re rising to meet that demand with strong partnerships, new talent and strategies that will help our clients adapt in the years ahead.”

 

Source: South Florida Hospital News