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January 2017 — Health Care Properties Quarterly — Page 9
M edical office buildings are
one of the most highly
sought-after property
types in commercial real
estate. Over time and with
proper management, they have
continued to provide owners with
reliable returns due to stable ten-
ancy, rent growth and physicians
who need to co-locate with health
systems of complementary practices
creating strong referral patterns.
Owners that have been benefiting
from this stable cash flow may need
to consider if now is an ideal time to
sell based on current market condi-
tions. Interest rates are at all-time
lows, debt sources are continuing to
lend aggressively and investors such
as public real estate investment
trusts and private equity firms are
looking to add medical office real
estate to their portfolios. The medi-
cal office market is thriving and real
estate owners could find themselves
in an attractive position if their
building is positioned to sell.
Several factors can define cap rate
value for MOBs. Is the building Class
A or B? Is the MOB located on or
off a hospital campus? What does
the tenant mix consist of? Class
A MOBs are usually newer with
modern mechanical systems. The
interior finishes, lighting, artwork
and sometimes water features are
all planned to provide a comfortable
patient experience. They generally
have quality credit tenants and are
located on or nearby a hospital cam-
pus. Buyers for these assets are gen-
erally REITs or private equity groups
that are looking for long-term stabil-
ity. Class B MOBs have attributes in
other areas and are
also attractive to
buyers. For those
off-campus Class B
MOBs, the tenant
mix is often made
up of independent
physicians who
do not need an
on-campus pres-
ence, however, it is
not uncommon to
find a hospital sys-
tem located in the
building. Whether
located in a busy
business district
for work-hours access, or a suburban
area for after school and evening
hours, hospital systems remain
interested in going to the patient
base. Other characteristics common
with Class B MOBs include good
ingress/egress, high parking ratios
and lower lease rates for physicians
who don’t need the convenience
of hospital services or who can-
not afford rates that Class A MOBs
demand.
The overall occupancy percentage
and tenant rollover of the MOB mat-
ters greatly to different buyer pro-
files. Public REITs that are looking to
report dependable numbers to Wall
Street are not looking to add value
to the building over a long lease-up
period. They are buying known risk,
where they can forecast reliable
annual rent growth of 3 percent and
maintain occupancy higher than
90 percent. While private investors,
who are not reporting quarterly to
the public, may look for a building
that is 75 to 80 percent occupied
where they can add value by fill-
ing vacant space with synergistic
groups and updating common areas
in order to push rents. Tenant roll-
over is a key component no matter
who the prospective buyer may be. A
MOB is significantly more attractive
when it has a tenant that occupies a
large portion of the building or has a
large primary care provider who can
send referrals throughout the build-
ing.
The demand for MOBs have kept
cap rates low. The debt markets have
continued to remain healthy and
available for buyers looking to secure
long-term, fixed-rate loans. Interest
rates are at historic lows and lenders
continue to see medical office build-
ings as an effective risk-reward asset.
Public REITs have continued to grow
and become more aggressive in look-
ing for places to deploy their capi-
tal. Due to the strong demand and
low supply of medical office space,
developers of new MOBs face rising
construction costs that demand high
lease rates and an 18- to 24-month
delivery timeline. Combining all of
these economic factors position own-
ers of MOBs to sell in favorable mar-
ket conditions.
While selling a medical office build-
ing is a question for some investors,
buyers are also flooding the market
to seek a safe investment yielding
consistent returns. So is now the
right time to acquire an MOB? Sta-
tistics, financing and political health
care trends make a strong case for
buying MOBs. The aging population
of baby boomers grows every day
along with the advances in medical
technology to improve their lives,
creating the need for medical space
and care for subsequent rehabilita-
tion and outpatient services. The
Affordable Care Act and the addi-
tional number of those insured has
put even more pressure on the need
for medical space and care. Hospitals
have continued to focus on cutting
costs and saving money wherever
possible. Procedures that were tradi-
tionally performed in hospitals have
moved to outpatient settings, such as
surgery centers or off-campus MOBs,
to save costs. Lastly, the capital mar-
kets for debt and equity are bullish
on MOBs, making it less challenging
to structure deals as a buyer. All of
these are positive trends MOB own-
ers want to see and hope continue.s
Interest rates are at
all-time lows, debt
sources are continuing
to lend aggressively and
investors such as public
real estate investment
trusts and private equity
firms are looking to add
medical office real estate
to their portfolios.
Broker Insights
Naum Nasif
Senior associate,
CBRE Denver
Healthcare
Services, Denver
Tech Center