medical real estate investment

As the 65-and-older age segment increases by 20 million individuals over the next 10 years, demand for healthcare services will rise, which attracts investors to the long-term growth potential of medical office real estate. Institutional funds and REITs are actively searching for larger healthcare deals and portfolios, and private capital is emerging as a major option in the $5 million to $20 million-price range and could begin to take a larger share of transactions this year, according to Marcus & Millichap’s National Medical Office Research report.
A rise in crossover capital is also increasing competition for medical office properties as single-tenant retail investors target similar investment opportunities in this segment for higher yields. For-sale inventory is limited as medical office assets are in high demand with cap rates compressing over the past several years.
On-campus medical office buildings command top cap rates, trading at sub-6 percent initial yields for single-tenant properties, while multi-tenant buildings draw first-year returns in the mid-6 to low-7 percent range, according to the report.
Off-campus medical office properties with strong tenancy, which often include a healthcare system and long remaining lease terms, are in high demand. These properties fetch initial returns in the mid-6 percent area.
Yields on other off-campus medical assets, including those in need of repositioning or located in secondary or tertiary markets, can trade up to 200 basis points higher. Factors such as quality, location, deferred maintenance and tenancy have an impact on returns for these assets.
Design, Building Amenities
The impact of an aging population and generational drivers on the design of medical office space has been realized in recent years as builders conform to the standards of a patient-centered approach to healthcare and advances in technology. Large healthcare providers are acquiring and expanding services off campus and closer to residential areas, providing patients easier access to care.

This has prompted the development of ambulatory surgery centers, standalone emergency rooms and large multi-tenant medical office buildings. As the way people seek medical care and how they approach changes, developers must keep up by offering flexible floorplates, convenient locations and amenities such as lean design, up-to-date technology and green building features.
Last year, medical office builders completed 7.5 million square feet of space, concentrating on markets located in the Southeast and West South Central regions, according to Marcus & Millichap. Approximately 50 percent of last year’s deliveries were located in the southern United States. The Marcus & Millichap report forecasts that more than 8.5 million square feet of completions are slated for 2017.
Absorption Concentrated in Newer Properties
The combination of reduced deliveries since the recession and strong demand from providers seeking space in recently completed medical office buildings has concentrated absorption in properties constructed since 2000. Vacancy at these properties has fallen more than 500 basis points since 2010, and constricting vacancy in these buildings will drive additional deliveries over the next several years.
With the majority of space demand channeling into newly built properties, older-vintage assets will bear the brunt of attrition as private physicians retire and private practices are acquired and consolidated into hospital systems preferring newer buildings.
Vacancy has been flat over the past few years for properties built before the 1980s, but a significant number of assets built during this time are trading as investors seek opportunities to create value. Updated buildings will attract tenants in search of more modern amenities in areas closer to hospitals or medical office campuses.
Strengthened demand for medical office space during 2016 pushed down vacancy 80 basis points, ending the year at 8.2 percent, the lowest rate in the past 10 years, according to Marcus & Millichap. The Central Plains region realized the strongest decline in vacancy, tumbling 150 basis points to 4.6 percent and boasting the tightest regional vacancy rate in the country.
Rent advances persist, but growth restrained by changes in healthcare landscape. Hospital acquisitions of private practices and the move of outpatient services away from campuses and closer to where patients live and work are placing major medical providers in control of a large share of leasing activity. As a result, overall rent gains are trekking along at a modest and steady pace.
Despite space demand funneling into newer-vintage buildings, advances in marketed rent for these properties has ticked up just 0.6 percent since 2010.
Rent for buildings constructed prior to 2000 has produced the strongest gains, rising nearly 3.5 percent over the past six years.
Overall, medical office rental rates advanced 0.4 percent during 2016, reaching $22.74 per square foot at the end of the year, according to the report. The strongest increases recorded during the annual time frame occurred in the California and Mountain regions, advancing 1.3 percent and 1.2 percent, respectively. Just two regions, the Pacific Northwest and West South Central, realized declines over the 12-month period.
Source: REBusiness

holistic design

Health care facilities can be stressful places for patients and visitors, with depressing waiting rooms, rows of uncomfortable seating, a blaring television. But designers of some medical spaces are remedying the situation.
A more holistic approach includes mood-elevating colors and artwork. Chairs are angled to look out the window. Screens offer calming nature scenes instead of newsfeeds. There’s softer overhead lighting and skylights. Sometimes, diffusers even waft a gentle breeze of lavender or citrus to mask the harsh scents of disinfectants and medicines.
Sheila Semrou, a Milwaukee-based design consultant who has worked on numerous health-care facilities, says she takes inspiration from local scenery and geography. Think big windows, natural light and a palette that reflects outside vistas.

“The results can be supportive spaces that nurture occupants and provide comfort,” she says.

New research is showing that a lot of clinical design norms are hard on patients, she says. Bright, polished floors can be slippery, and create glare. Bland color schemes aren’t so much soothing as uninspiring.

“Studies suggest that some of the best environments for health and healing incorporate a variety of hues, use both warm and cool tones, and vary color saturation,” Semrou says.

At the Diane L. Max Health Center in New York City, a project by Stephen Yablon Architecture, upbeat primary and neon colors were used on midcentury-style seating, facades and to define different areas of the building.
On the other hand, in the reception area of Memorial Sloan Kettering in West Harrison, New York, blonde terrazzo floors, rift white oak and chic, light blue chairs clad in walnut veneer create a serene space, designed by EwingCole.
In colder climes, a fireplace can add a welcoming feel at little cost, says Carolyn BaRoss, who leads a health-care interior design division at the New York firm Perkins and Will.

“A number of our projects in Canada and the northwestern U.S. have included fireplaces as part of the waiting areas and other lounges,” she says. “We try to specify ones that look the most realistic and surround them with interesting materials. We’ve used both electric and gas fireplaces. They provide a source of warmth, but are fitted with a protective enclosure for safety.”

BaRoss says an Orlando, Florida, project, Nemours Children’s Hospital, has a “hospital in a garden” theme, with nature elements, daylight and views woven into the design. There are small “picnic blanket” designs in the flooring pattern, and child-size play areas, as well as “ceiling elements like the large flower in the dining area.”
Treatment areas are also benefiting from this kind of patient-focused design. The Florida Hospital for Children in Orlando and the Women and Children’s Hospital in Adelaide, Australia, are among facilities offering the “Philips’ Ambient Experience” in MRI suites. Patients select a lighting color, as well as audiovisual projections like nature scenes, to help ease anxiety during the procedures.
At Mercy St. John’s Hospital in St. Louis, an enormous vibrant butterfly greets visitors in the lobby, while patient floors are decorated with laser-cut images of animals.
BaRoss says new LED technology allows for more dimmable, flattering lighting, which can also be used to help patients find their way in a new facility.
At the Colorado Center for Reproductive Medicine in New York City, designed by Perkins and Will, chairs face out onto the cityscape. Look out the window, and you’ll also see Robert Indiana’s large “Hope” sculpture on the street below.

“The waiting room is typically where a patient will spend the most time. With that in mind, we took care to design an environment that’s low-stress and soothing,” says Dr. Brian Levine, the practice’s director.

“We took advantage of the views by placing our waiting room in the brightest and most visually stimulating aspect of our floor plan. We chose light-colored wall coverings, flooring, and furniture to help reflect and carry the light throughout the room, so no patient would ever feel like they’re in a ‘dark corner,’” he says.

Melissa Thompson, a health-care industry strategist from Westport, Connecticut, developed breast cancer shortly after giving birth to her daughter in 2015, and began a long treatment journey. The experience got her thinking about how important physical environment was to her comfort and, she believes, even her recovery.

She didn’t stay long at the first hospital she went to: “It smelled bad — like an old cafeteria full of chemicals.”

But Greenwich Hospital in Connecticut and Memorial Sloan Kettering in New York City were a different story. Rooms were oases of natural woods and light. Both hospitals had lounge areas where patients could relax outside of their rooms in a warm, comfortable atmosphere.

“I was noticeably happier, and discharged sooner,” she says.

Source: The Frederick News-Post

pbg-health

Palm Beach Gardens Medical Center, or at least the real estate where the hospital operates, has a new owner.
Tenet Healthcare paid landlord HCP Inc. $43.4 million for the 282,000-square-foot facility on Burns Road, according to property records. HCP is a California-based real estate investment trust that specializes in medical facilities.
The companies also recorded a lease termination. Palm Beach Gardens Medical Center is in the midst of a $16 million renovation.
The Palm Beach County Property Appraiser records no previous sale price for the hospital, but HCP says in its latest annual report that it paid $24.9 million for the facility in 2011.
Dallas-based Tenet Healthcare operates 10 hospitals in Florida, and the 199-bed Palm Beach Gardens Medical Center was the only one it leased rather than owned, according to the company’s latest annual report.
Source: Palm Beach Post

Senior Housing

Health care REITs face some challenges, which we expect to result in slower, albeit still positive, earnings growth in 2017. These challenges include slowing fundamentals for the senior housing sector and rising capital costs.
Over the past several years, health care REITs have expanded their senior housing portfolios substantially. Health care REITs are attracted by the sector’s focus on private pay sources of revenue and good demand from the growing population of seniors, which is living longer and wants residential care that offers assistance with daily activities and light medical needs. However, new supply of senior housing is rising and wage expense pressures are building in many U.S. markets. These trends are credit negative for health care REITs, and as a result, we expect more modest earnings growth for the REITs in 2017, particularly as many REITs have assumed more operating exposure via the use of taxable REIT subsidiaries. These subsidiaries allow the REITs to directly realize the properties’ net income after paying a third-party management fee. Health care REITs also invest via triple-net-lease structures, which limit the risk to the operators’ ability to keep making rent payments.
The operations of the taxable REIT subsidiaries have been a strong source of profit growth over the past few years for health care REITs. This profit growth has already begun to slow, however, and we expect it will continue to decelerate as more supply comes on line and as higher labor costs persist in 2017.
The extent of the downside for REITs will depend on the strength of their operating partners, as well as supply-demand characteristics within their sub-markets. For their triple-net-lease portfolios, tenant diversification and strong rent coverage ratios (1.2x or greater) are other key mitigating factors.
Another key challenge is the increasing cost of capital. Health care REITs rely on cost-effective access to debt and equity capital to finance acquisitions that drive their earnings growth. They also rely on external capital to refinance ongoing debt maturities, given their limited structural ability to retain cash flow. However, their debt costs are rising and their stock prices remain volatile owing to the prospect of rising interest rates, a situation that is resulting in compressed spreads earned on new investments and higher refinancing costs.
We expect rising capital costs to remain a credit challenge for health care REITs in 2017. The 10-year US Treasury yield rose to 2.48 percent as of Feb. 1, 2017, up from a low of 1.37 percent as of July 5, 2016. Moody’s Analytics expects the 10-year to rise to 2.9 percent by year-end 2017, and to 3.7 percent by year-end 2018.
Longer term, we expect health care REITs to reap some benefits from rising rates. Higher borrowing costs will affect all potential real estate buyers, both private and public, prompting asset prices to come down from the current, historically high levels. However, it will take time for prices to adjust to the changing rate environment, and we expect the earnings growth of health care REITs to slow accordingly this year. This modest growth outlook could present credit challenges if it were to incent REITs to use more leverage or riskier transaction structures to boost their profitability.

Source: CPE

Pile of Dollars

Real estate investment trust Duke Realty Corp (DRE.N) is exploring the sale of its medical office buildings that could be worth as much as $3 billion, as it seeks to focus on its warehouse portfolio, people familiar with the matter said.
The move represents the latest strategy shift for the Indianapolis-based company, two years after it decided to shed its suburban office properties to shield itself from volatility in the wider U.S. commercial real estate market.
Duke Realty is working with investment bank Morgan Stanley on the sale of its medical office portfolio, which has attracted the interest of healthcare-focused REITs, the sources said this week. The sale process is ongoing and there is no certainty it will result in a deal, the people added.
The sources asked not to be identified because the matter is confidential. Duke Realty and Morgan Stanley did not immediately respond to requests for comment.
Duke Realty shares jumped as much as 1.3 percent on the news to $26.03, giving the company a market capitalization of more than $9.3 billion.
Duke Realty owned a portfolio of 561 commercial properties in 21 major U.S. metropolitan areas encompassing 139.6 million net rentable square feet as of the end of December, according to its latest annual report. Out of those, 455 were bulk distribution industrial properties and 86 were medical office buildings.
The divestiture would leave Duke Realty’s portfolio comprised almost solely of industrial properties. These have been among the real estate sector’s strongest performers because of the advent of internet shopping, which has buoyed demand for warehouse space to store and process goods for shipment.

“The REIT’s well-located portfolio of industrial assets should continue to benefit from accelerating demand for high-quality logistics product and measured supply growth,” Moody’s Investors Service Inc analyst Alice Chung wrote in a note in November.

While Duke Realty’s medical office properties have proved resilient in economic downturns, their fortunes are tied to those of hospitals they share a campus with. Many hospitals are expected to take a hit if the Affordable Care Act is repealed, because fewer patients are expected to be covered by the alternative.
As well, the growth rate of rents in Duke’s medical office building portfolio has lagged that of its industrial properties. Real estate investors tend to reward REITs that focus on a single type of real estate, and buy or develop similar quality properties.
Source: Reuters