CREJ - Healthcare Properties - JANUARY 2017
Medical 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 tenancy, 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 conditions. 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 medical 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 campus. Buyers for these assets are generally REITs or private equity groups that are looking for long-term stability. 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 presence, however, it is not uncommon to find a hospital system 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 cannot afford rates that Class A MOBs demand. The overall occupancy percentage and tenant rollover of the MOB matters greatly to different buyer profiles. 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 filling vacant space with synergistic groups and updating common areas in order to push rents. Tenant rollover 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 building. 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 buildings as an effective risk-reward asset. Public REITs have continued to grow and become more aggressive in looking for places to deploy their capital. 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 owners of MOBs to sell in favorable market conditions. While selling a medical office building 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? Statistics, 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 rehabilitation and outpatient services. The Affordable Care Act and the additional 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 traditionally performed in hospitals have moved to outpatient settings, such as surgery centers or off-campus MOBs, to save costs. Lastly, the capital markets 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 owners want to see and hope continue.