When Physicians Realty Trust announced a purchase of 18 medical office facilities located in eight states for about $735 million last month, the Milwaukee-based REIT didn’t just sweep up prime properties. It won a round in the business of investing in medical office buildings (MOBs), which has become increasingly competitive.
The pending purchase includes the Baylor Cancer Center in Dallas, Texas. In a statement, executives with Physicians Realty described it as an on-campus medical office building consisting of about 458,396 net leasable sq. ft. At a purchase price of $290 million and after closing, the unlevered cash yield is expected to be 4.7 percent.
The intense vying for urgent care centers, surgery centers and other outpatient medical facilities is also driving down cap rates in the sector. Cap rates on MOBs tightened to 6.5 percent in the fourth quarter of 2016, after holding steady at 6.7 percent for the three previous quarters, according to the latest information from Revista, an Arnold, Md.-based property research firm that examines all out-patient medical properties. In its cap rate report, Revista examines a relatively small sampling of four transactions in four quartiles.
Its analysis found that tightening occurred for almost all segments of the market. Among the deals with the lowest reported cap rates in the fourth quarter of 2016, cap rates averaged 4.2 percent, down from 4.4 percent the quarter prior and 4.7 percent the year prior. On transactions in the 25th percentile, with the highest cap rates, cap rates averaged 7.0 percent, flat with the quarter prior. Median cap rates averaged 6.4 percent, down from 6.6 percent the quarter before.
The tightening is an indication of keen interest among domestic and international investors, all vying for purchase opportunities that seem too scarce.
“There has been a lot of demand,” says Hilda Martin, a principal at Revista. “A lot of new investment groups are entering the sector. There is more demand for less and less opportunity, and it’s just very competitive out there now.”
The Private Equity Gaze
Private equity firms are a relatively new investor group that has been particularly eager to scoop up quality MOBs, according to Martin.
“They have historically been running at the $1 billion a year mark in acquisitions,” Martin says. “That has bumped up to $5 billion on an annual basis more recently. There is more interest—and they are not selling as much as they are buying.”
The recent upturn has been in place for about 12 to 18 months, Martin estimates. The interest among those companies is even prompting private equity firms to extend hold periods beyond the customary seven or eight years. The firms are drawn to the medical sector because it is a very stable segment. Medical practices tend to sign long-term leases and have stable occupancy and vacancy rates, too.
Private equity groups are not the only investor group circling the segment. Virtually all institutional investors, REITs, private capital investors and developers recently surveyed by real estate services CBRE indicated that MOBs meet their acquisition criteria, with 97 percent saying they preferred the property type.
The CBRE U.S. Healthcare Capital Markets 2017 Investor & Developer Survey was sent to investors and developers and received 91 total responses. Respondents indicated that:
-Their firms had allocated $14.9 billion in equity to healthcare real estate investment and development for 2017.
The market cap rate for MOBs falls between 6.0 percent and 6.5 percent, according to 39 percent of respondents, making it the most aggressively priced property type.
-They are in the market to be net buyers, according to 78 percent of respondents.
-About 27 percent of investors and developers require a minimum ground lease of 60-29 years for an investment.
-As for how cap rates are expected to move in the sector, the experts see more competition—and potential compression—ahead.
“A lot of companies are looking for sweet off-market deals that no one knows about,” Martin says. “That tends to be the sentiment when people are calling up, ‘Where can I find the opportunity?’”
Source: NREI
Coming off a successful year that saw many advances, and with Carlos Migoya set to continue as president and CEO of Jackson Health System, officials of Miami’s Public Health Trust are cautiously optimistic about the future. The trust administers Jackson Health System, which includes Jackson Memorial Hospital and a network of clinics.
“Every year we come here and every year it has improved,” Joe Arriola, trust chairman, told Miami-Dade’s County Commission. “Jackson is better than it has ever been. There have been some exceptional changes, and we’re here with some incredible news: I am happy to say that Carlos Migoya has agreed to stay on for another two years.”
But “we are heading into rough times politically, and the squabbling is just going to get worse. To survive this, we need your help,” Mr. Arriola told commissioners.
“This has been one of the proudest chapters of my life,” Mr. Migoya said. “We have new facilities and are renovating patient care facilities across the system.”
The $175 million Christine Lynn Rehabilitation Center, set to open in 2019 or 2020, is the first project in which Jackson, the University of Miami and the Miami Project to Cure Paralysis have combined their resources in a single facility, he said.
“Research will be actively integrated into patient care, and it will be one of the most sought-after places in the country to recover from an injury,” Mr. Migoya said. “This positions Jackson and UM in a landmark treatment center.” Two old administration buildings will be torn down to accommodate the center, he added.
Jackson West, an inpatient hospital with outpatient and diagnostic clinics, is set to open in mid-2019, he said.
“This is in Doral, the fastest-growing area of the county, and we’ll be able to provide services to that population.” A separate walk-in care center will be six miles away, but also in Doral, he said.
Though he didn’t discuss the upcoming budget with commissioners, Mr. Migoya categorized it as break-even. The ever-rising cost of prescription drugs, salary costs to stay competitive, pressure from insurance companies to lower reimbursement rates, and the uncertainty of national health insurance are among the reasons, he said.
“I expect the coming year to be the most challenging since 2011,” Mr. Migoya said. “We’re getting ready to open new facilities, and doing it amidst storm clouds hanging over health care.
“We’re improving efficiencies and streamlining costs in non-clinical areas,” he said. “Labor and management are in partnership to identify ways to upgrade the patient experience.”
“What’s the plan” for survival? asked Commissioner Daniella Levine Cava. “The State Legislature came back with some dedicated funds, but not at the same level as before.”
“It depends on what the funding is,” Mr. Migoya said. “Every year for the past seven years, we’ve had cuts; last year it was $60 million.” Leaders in the Florida House of Representatives reduced the cut to $19 million.
“But the brand has changed,” he said. “Now, paying patients choose us, and we’re improving efficiencies to get patients home sooner, safely. The key to growth is to turn beds fast, and we want to do that so we can offer more access to everyone in the county.”
Assuming the US Senate passes a healthcare bill, “How much time will you need to know the economic hit?” asked Commissioner Sally Heyman.
“We could end up with some positives,” Mr. Migoya said. Florida turned down the expansion of Medicaid that was part of the Affordable Care Act. “The states that expanded Medicaid could take a worse hit. And some in government are looking for ways to help Florida.”
Source: Miami Today
A post-occupancy evaluation (POE) gathers feedback from facility users to assess how well a building is performing. This evaluation is typically conducted about a year after occupancy and can be used for many purposes, including fine-tuning the facility to increase performance or evaluating the design to inform a new facility. Architects are aware of these benefits, but often struggle to justify the additional cost of conducting one to a client after the project is complete. The costs can be significant if an independent research consultant is involved, which is recommended because researchers can offer standardized, reliable methodologies and eliminate any design team bias.
These circumstances make it difficult for smaller healthcare organizations, which have neither the budget nor the resources for research consultants, to conduct a POE. Recently, Vision 3 Architects (Providence, R.I.) identified a practical and affordable solution to that problem by partnering with students from Roger Williams University’s School of Architecture, Art and Historic Preservation in Bristol, R.I. Together, the team completed one-year POEs for two facilities designed by Vision 3 Architects for Thundermist Health Center. The students served as the research team and helped to guide a future project design based on their findings.
Coming Together
Thundermist Health Center, a community health organization based in Warwick, R.I., provides medical and dental care and health-related social services to low- and moderate-income patients throughout the state. In 2013, Vision 3 and Thundermist began working on the design for the Thundermist Health Center of South County in Wakefield, R.I. The team had previously worked together on the design of a clinic in West Warwick, R.I., which opened in 2011 featuring patient-centered design concepts, including three pods of exam rooms, consultation rooms, and meeting spaces designed around central collaborative team areas.
Before diving into the design of the South County project, Thundermist leaders wanted to evaluate the results of the patient-centered design features in West Warwick to see what was working and what needed improvement. For example, they wanted to revisit the location and quantity of the staff team rooms and how many exam rooms a support team could handle. The team also wanted to see how the existing layouts were affecting patient visibility and staff privacy.
To achieve that, Vision 3 reached out to the university, which was offering a graduate course titled “Environmental Design Research.” The timing worked out well, as the semester was just starting and the professor was looking to partner with an architectural firm that had worked on some local healthcare projects and had a client that would allow students to research their facility. Vision 3 and Thundermist agreed to meet with the students to discuss the project and to provide access to the building to photograph, observe, and conduct interviews, and the students would provide precedent studies and research articles and analyze how the building design performed against the original design goals. Their final exam would be a class presentation of their findings.
The process, including the POE, data evaluations, and final presentation to the team, took place within one semester. The entire team, including the architecture firm, was given a link to the spreadsheet data to review the progress. The class of 16 students had monthly meetings with the design team at the facility, Vision 3’s office, or on campus. They weren’t paid but gained valuable experience and contacts working with a local architecture firm, and, in exchange, provided the client with unbiased feedback on the performance of its building. The professor met weekly with the students, closely monitoring the interview process and data evaluation, and incorporating lessons on the principals of evidence-based design and the role that research plays to validate design decisions.
The students spent about eight weeks observing and interviewing the staff, patients, and visitors using photo elicitation and a standardized interview document and format that was developed and monitored by their professor. The POE looked at different elements of the building in terms of the patient experience. One area of interest was the waiting room design, including acoustics, the check-in and check-out processes, and the layout of reception desks, which placed the staff at high desks instead of behind sliding glass windows.
In general, patients responded favorably to the waiting room, finding the aesthetics and natural light welcoming and the seating comfortable. They also liked the staff greeting them at eye level at the reception desk without a glass window. However, patients reported that they had a difficult time understanding where to stand or line up for the check-in/out process. The staff also suggested that the acoustics of the waiting room could be improved to protect patient privacy and to manage the overall noise level of the space.
In the clinical areas, the POE looked at how the number of medical staff members sharing team rooms affected privacy. The staff said they enjoyed sharing a team area and felt that overall patient care was improved by their collaboration. But the team area, which contained 12 staff members, was often too loud, so they suggested limiting the size of the staff areas to eight people in future designs and implementing a system for asking the room to “quiet down.” And while they liked having the team room central and surrounded by exam rooms, they felt they didn’t have enough access to daylight.
The size and layout of West Warwick’s exam rooms received universally positive responses. Each exam room contained a mobile supply cart that was docked below the countertop, adjacent to the hand sink. The staff liked that the supplies were tucked away when not needed but could be brought directly to the exam table when necessary and that the top of the cart could serve as another countertop. The laptop in the exam room was also stored on a mobile, height-adjustable cart, which allowed physicians access to their laptops while facing patients and could be moved out of the way when not needed. Based on this feedback, the design was duplicated exactly for South County’s exam rooms.
Additionally, the POE of West Warwick studied the facility’s community room, which is used to hold meetings and classes for the staff and patients. The organization wanted to better understand how the space was being used and if this feature was an asset and should be included at the South County facility. West Warwick’s community room earned positive feedback, with respondents reporting that the layout of the room allows for flexibility and the room’s operable partitions enable the room to be divided into multiple spaces to support simultaneous functions. A kitchen in the community room is used for patient education cooking classes and the local community was utilizing the room after hours for local meetings and events.
Informing Design Decisions
Based on the results of the POE performed on the West Warwick location, the Vision 3 design team made several important changes to the design of the South County facility, which opened in 2015. For example, in the waiting room, the reception desk was redesigned to be closer to the main entrance for staff to greet patients directly upon entering the facility and to avoid any patient confusion over the check-in process. The waiting room seating was also relocated to be adjacent to the exterior wall to provide access to natural light and views outdoor. Acoustics were addressed by adding carpeting, upholstered furniture, and acoustic ceiling tiles.
For the staff spaces, Thundermist took the lessons from the POE to redesign the central staff team area to feature four six-person team pods with five examination rooms in each pod. The team staff rooms were relocated to exterior walls to provide outdoor views and natural lighting and are adjacent to that staff’s pod of exam rooms. The layout of the team rooms was also adjusted so that the work areas face the walls for greater staff privacy and a wall cabinet for personal storage was added above each desk. For the corridors connecting the team areas with the exam rooms, patterned glass windows were added to improve access to natural lighting in the corridors and create a visual connection between the team and the exam rooms. Due to the success of the community room in West Warwick, Thundermist included a community room in the design for South County, with a similar room size, operable partition, and kitchen.
In mid-2016, Roger Williams University students produced another POE for Thundermist—this time on the completed South County facility—finding that many of the changes were working successfully. For example, in the waiting area, patient seating, which was arranged in both small and large groupings adjacent to the exterior walls, was providing access to natural light and outdoor views. The location of the reception desk near the entrance was also working well with patients experiencing minimal confusion about where to check-in. However, the acoustics were still a concern, so Thundermist installed a white noise system.
In the staff team pods, the proximity of team areas to examination rooms saved time and steps. Staff enjoyed the improved access to natural lighting and outside views in the room, and the patterned glass partitions between staff areas and the corridors worked well in allowing more natural light into the corridors, while also protecting the privacy of the staff work areas.
Moving Ahead
Throughout this process, we’ve learned some valuable lessons on conducting a POE. Thundermist and the university worked closely to make sure that facility operations were not adversely impacted by the students’ presence. The initial group tours and building photography took place in off-hours. To encourage participation in the POE, the staff was invited to meet with the students during lunch breaks, while patients were given a hand-out, with photos of the students, that explained the process and informed them that their 15-minute interview would be kept anonymous.
It’s critical that whoever is leading the process—whether a professor or a design team—sets the standards for the research documentation. In these POEs, the interview forms the students used were critically reviewed and trial tested. After the interviews were complete, the students entered the data into a spreadsheet, which included the gender, age range, whether the person was a patient or staff member, the room or space discussed, their frequency visiting that area, the date, the length of interview, and the feedback on the specific space. The team discussed the results, and at the end of the semester, the students presented their findings back to the design team and Thundermist.
Vision 3 plans to continue to serve as an architect sponsor to the Roger Williams University Environmental Design Research class and has recommended the university as an affordable means to provide POEs for other community health center clients. Vision 3 and Thundermist are now redesigning the first Thundermist Health Center in Woonsocket, R.I., which opened in 2005, using many of the lessons learned from these POEs to greatly inform the project. Roger Williams University students will likely perform a POE for the Woonsocket facility a year after it opens. We would recommend that design firms contact their local architecture school and discuss how they can form a relationship that benefits both parties.
Source: Healthcare Design
