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A new report from BTIG shows that health care REITS are down nearly 26% year-to-date as opposed to the wider REITS sector, which is down about 14%.

The report states that health care “remains a sector of change.”

“The acute phase of the COVID-19 pandemic has led to different levels of operating stress across the healthcare system,” the report states…. “Potential disparities in outcomes based on insurance coverage during the pandemic could also lead increased calls for changes to government healthcare programs.”

The same report does show that medical office building REITs have held up pretty well and have been “relatively resilient.”

The report says that since April during the midst of the coronavirus pandemic, “outpatient volumes have risen to 69% of pre-COVID levels… Accordingly, our MOB (medical office building) coverage has collected 95% of second quarter rent on average, stability which is reflected in unchanging MOB dividends.”

As it pertains to senior housing trends, BTIG says senior housing facilities and their residents are taking the advice of health experts.

The numbers of seniors in such facilities who have contracted the virus has declined, BTIG says.

“Specifically, for SNR, less than 0.2% of residents and employees are positive for the virus, and the new case rate has declined 91% from peak levels in April,” the report says. “Thus, 90% of SNR properties have begun lifting restriction using a phased approach so that residents can return toward normality and new residents can begin moving in.”

The report concludes: “We expect this same-store operational and occupancy focus to remain at the forefront until REITs’ cost of capital improves enough to return to the acquisition market.”



Source:  GlobeSt.

There continues to be very strong investor appetite for medical office buildings (MOBs), according to several industry sources.

Roughly $4.7 billion’s worth of medical office buildings traded in the first half of 2019, according to Mike Hargrave, principal at Revista, a medical research real estate firm. While investment volume in the sector is off its recent highs of 2017 and 2018, that’s been due to fewer portfolios coming on the market recently, says Hargrave. Investment sales volume in the MOB sector reached $6.5 billion in the first half of 2018 and $12.4 billion for the whole year, according to Revista data.

Investment sales activity for the second quarter of 2019 totaled $3.0 billion, Revista reports. A large portion of this total came from Welltower’s $1.25 billion purchase of 55 medical office buildings from CNL Healthcare in June.

“It remains to be seen if 2019 will rival the past two years [in] total transaction volume. If it falls short, it will be due to not as many large portfolio transactions, which could have been impacted by higher interest rates during the earlier part of the year,” says Matt Withey, managing director of acquisitions at Virtus Real Estate Capital, a private equity real estate firm. “But appetite remains very strong, especially for high quality medical office buildings. Investors remain drawn to the durability of the cash flow stream, especially those who think we are in the later stage of the current economic cycle.”

Pricing remains tight for medical office building, with cap rates averaging 6.6 percent in the second quarter of 2019. Earlier in the cycle, cap rates for medical office buildings were much closer to those for suburban office buildings, according to a report from research firm Real Capital Analytics (RCA).

According to Revista, cap rates on MOB properties have averaged at 6.4 percent over the past 12 months. But they can range from the low 4.0 percent to high 7.0 percent, with the “low end representing larger core medical office buildings in well-located markets” and the “higher end representing value-add plays,” says Hargrave. Withey says many medical office buildings trade at cap rates of between 5.5 percent to 7.0 percent.

“There’s still a lot of transaction activity. If there was a huge gap with buyers holding firm and not selling anything and bidders wanting a discount, you would see a sharp drop in deal activity and cap rates flat” says Jim Costello, senior vice president with RCA. “But we’ve got elevated cap rates and single asset sales, so the bedrock of the market is still doing great and growing.”

Medical office building completions in the U.S. average roughly 20 million sq. ft. annually. New construction in the space has gone through ups and downs since 2017, largely due to factors such as HVCRE regulations, high construction costs and labor shortages. For this reason, MOBs are “not facing an oversupply problem like a lot of other sectors.” according to Withey.

“The services delivered within medical office buildings [are] growing faster than the space [they are] delivered in. Additionally, increases in technology [are] allowing more and more procedures that were traditionally delivered within an in-patient setting to be delivered in an outpatient setting,” says Hargrave. “So, demand for new state-of-the-art space is consistently increasing within the medical office building sector.”

Most healthcare REITs, including Welltower, Ventas, HCP, as well as REITs focused specifically on medical office buildings, such as Physicians Realty Trust, Healthcare Trust of America, and HR, continue to have an appetite for buying medical office buildings, says Hargrave. Additionally, several large institutional investors, including Harrison Street Realty Capital, MB Real Estate and LaSalle, have a focus on the sector.

Despite some unpredictability in large portfolio activity in the MOB sector, Withey says “private and institutional investment has been consistent and growing.”


Source: NREI


The hospital’s monopoly on healthcare is coming to an end. These large institutions aren’t going anywhere, of course, but every year, more and more people receive treatment in medical office buildings (MOBs), retail centers and other off-campus facilities. And real estate investors have taken notice.

The drivers for this shift to off-campus healthcare are numerous. Mergers among health providers have changed how physicians interact with patients, as have emerging technologies that make it easier and cheaper to decentralize medicine.

But the biggest stimulus is access. For all its complexity, healthcare is still a consumer-facing business, and the consumers want convenience. This is why medical providers seek to place offices in neighborhoods and suburban areas, closer to where people live and where they work.

“What our hospital CEOs are telling us is that there is a general move away from inpatient toward outpatient care, not just for financial reasons, but also for the convenience of the patient,” said John Abuja, senior director at Marcus & Millichap.

New, single-tenant MOBs remain attractive to both private and institutional buyers, according to a recent Marcus & Millichap report. If a property has the backing of major medical providers or hospital systems, leases trade at a premium, with first-year returns in the high-5 to low-6 percent range on average.

Developing a medical office asset off-campus can lead to higher rents as the high-quality submarkets where service providers want to set up shop have higher underlying base rents in general. Also, there is a trend toward more opulent build-outs that the end users seem to desire.

“The rise in rent can in part be attributed to the additional cost and sophistication and demand now for higher levels of service and patient comfort,” said Abuja. “Some of these facilities have wider hallways, larger exam rooms and really they have Class A finishes. Ironically, a lot of that is being driven now by the patient, more so than even the physician.”

Though MOBs are attractive to investors and are therefore under development at a rapid pace, there are opportunities in retail locations as well. The types of medical uses that a community shopping center or even a power center can support create some limitations, but there are prospects for suitable location/use matchups.

“Retail locations are going to find it very difficult to attract certain healthcare tenants because of the need for backup generators or surgical suite amenities,” Abuja said. “That said, there are a lot of non-invasive, MRI imaging and other tenants that are a great fit for a storefront location.”

However, locating a medical use in a retail environment will put the property into competition with other asset classes. The premier locations where they want to be are also where everyone else wants to be—a situation that can lead to higher development costs.

“If a developer is building into a retail center where they are in competition with other retail rents, then the cost of being there is higher because they’re competing with other retail tenants for the same location,” Abuja said. “Some of the retail rents, especially restaurants, far exceed what you typically pay on an office space.”

According to Abuja, while a $65 per square foot buildout cost years ago was relatively standard, now it could be upwards of $150 per square foot to redevelop a retail location for a medical office use. However, if and when the fit is right, getting closer to the end user can justify these additional costs.

Erected in the mid-1970s and with a gross leasable area of more than 164,000 square feet, The Oak Mill Mall in Niles, Illinois was always a hybrid. It’s anchored by a Jewel-Osco grocery store and has the look of a large strip mall from the outside, though it actually has everything that a ‘70s-era mall would have: two levels, storefronts within an enclosed space and even an indoor water fountain.

As retail tenants began to move out, however, the property rebranded as “Oak Mill Plaza” and began targeting healthcare providers. Now, approximately half of the retail tenants are medical purveyors of one stripe or another, including pediatrics, oncology, dentistry and a travel clinic.

This location is a deviation from the norm, however. Most retail centers max out at one or two healthcare tenants, typically in an outlot location. And for the financial backers, the real money is in MOBs.

There are strong consumer forces pulling medical office properties away from institutional campuses and out to Main Street. However, there are strong forces keeping MOBs in orbit around a hospital as well.

“There is comfort to investors knowing that they are on or near a hospital campus where supply characteristics are insured. If I had to make a choice between an on-campus or an off-campus building, I would still rather be on campus or tangent to campus just because the doctors are already there,” Abuja said. “It’s not ‘build it and they will come.’ They’re already there. That’s why most investors, if they could choose, would still rather be on campus or near campus with an MOB.”

According to the Marcus & Millichap report, many physicians are bringing buildings to market in order to cash in on increased equity; properties tenanted by a private physician typically trade 100 basis points above those leased by major medical groups.

Sale-leaseback opportunities with private physician groups often require personal guarantees of leases, so investors should be mindful of lease terms as many buyers prefer to have major hospital system or healthcare group backing as they lead to longer lease guarantees.

As investors seek stabilized, multi-tenant medical office properties in primary and secondary markets, the yield spreads between on-campus and off-campus assets have compressed. In today’s market, private investors and institutions alike expect similar returns regardless of an assets’ proximity to an established hospital.


Source:  RE Journals

Hospitals often view their medical office building (MOB) investments differently than doctors that own their medical facilities. Doctors can build equity owning MOB’s during their career, with an expectation to cash out equity near retirement by either selling to a practice partner based on a market appraisal, or by structuring a Sale/Leaseback transaction with an investor to create a higher net present value of the MOB asset.

Hospitals typically have more complex issues to assess. Most have an investment portfolio consisting primarily of equities. Some hospitals consider MOB’s to be part of their investment portfolio. Other health care systems do not, and view their MOBs strictly from an accounting standpoint as an operating asset. A hospital system typically owns buildings they occupy with other owned MOBs rented to doctors and other health care providers.

Owner-Occupied MOBs

Hospital-occupied medical office buildings are good candidates for sale/leaseback transactions to monetize value in cases where the hospital has limited access to capital for property improvements, expansion or to free up cash to fund operations. However, it is not always necessary for health care providers to monetize owner/occupied MOB’s if they have strong credit with good access to capital at reasonable rates.

Tenant-Occupied MOBs

Hospital-owned, tenant occupied MOB’s have recently become a higher priority to sell for several reasons. MOBs are investments that tie up hospital capital that could more effectively be utilized on more strategic investments. Vacant MOB spaces provide zero-to-negative returns on this capital. Due to soft office market conditions across the US, many hospitals have increased vacancies with the opportunity cost of this capital tied up in their MOBs.

The estimated value of MOB holdings is added to the health care provider’s investment portfolio which hospitals use to analyze “MOB holdings percentage” of total investment. When the ratio of “MOB Holdings” as a percentage of total portfolio assets increases, portfolio risk also increases from an investment perspective due to the lack of geographic and industry diversification inherent in MOBs. This is especially true if patient volumes decrease as is the case currently in many markets. There are significant concerns today when effects of our uncertain economic conditions combine with uncertainty posed by health care reform. Special attention to safe diversification of the hospital’s overall investment portfolio is warranted.

Sale/leaseback of select hospital occupied buildings and/or straight sales of tenant occupied buildings can provide that asset diversification and improve the cash positions at a time when cash can be utilized to take advantage of more strategic opportunities.

An example of this strategy can be seen in the transaction where Carle Foundation Hospital sold its 92,000 sf MOB in Bloomington, IL for $24.25 million or $264 per square foot at an 8.5% cap rate, according to Robert Tonkinson, former CFO of the Carle Foundation based in Urbana, Illinois.

New Statutes: Stark Law

Two new statutes recently enacted by Congress will bring greater governmental scrutiny and action. Enforcement of these rules will cause headaches for hospitals and will likely motivate many to consider exiting commercial real estate or forming strategic partnerships with MOB real estate specialists. The “ 2009 Fraud Enforcement and Recovery Act” (FERA) and the “Patient Protection and Affordable Care Act” (PPACA) will have an impact on a hospital’s decision to self-disclose Stark Law violations related to hospital-physician leasing arrangements.

The impact of these rules on MOBs could be significant and cause many health care firms to sell their MOBs to third parties, if only to avoid the potential risks. Hospitals that wish to retain their MOB interests may consider outsourcing MOB management to commercial MOB specialists as an added layer of insulation from Stark Law liability. The most transparent and savvy way out of this newly heightened government scrutiny, however, may be to monetize MOB’s with sales or sale/master leasebacks. This avoids the inherent potential conflict posed by a doctor that refers patients to a hospital, and later asks the same hospital for six months free rent to sign a new lease. In this situation, the negotiation is driven by Federal Health Care Regulations with heavy fines awarded to hospitals that don’t live within these strict rules that are designed to protect patients by elimination of waste, fraud and unfairness within the federal healthcare reimbursement system. When a doctor asks a private investor MOB owner for six months free rent to sign that same new lease next to the hospital, it becomes a simple business decision driven by market forces, without the negative baggage of perceived conflicts of provider-owned MOBs.

MOB Values Up

The Deaconess Clinic of Evansville, Indiana sold five MOB’s totaling 260,500 sf for $45.26 million or $174 psf at an 8.25% cap rate in March 2010 using a 14-year term master lease back. According to Real Capital Analytics, the average annual sale price for MOB sales in major cities across the country of $5 million and up, has risensteadily from$140 psfin 2002 … to $218 psf at the top of the overheated market in 2006 … to $226 psf by the end of the second quarter of 2010.

This is not a misprint. We are actually getting higher prices today for large MOBs in major cities than we did at the peak of the real estate cycle just a few years ago. So what’s the catch? Unlike other segments of commercial real estate that have seen falling values, there is exceptional demand today supporting stronger-than-ever values for large MOB’s with strong-credit tenants on long term leases in major US markets.

But what about smaller MOB deals in smaller markets? I personally brokered the sale of 53 MOBs with an average sale price of $1,031,000 per transaction, located in tertiary markets in Florida, North Carolina, South Carolina, Georgia and Illinois from 2002 through the second quarter of 2010. I created the nearby bar charts to compare annual MOB big sales (i.e. $5+ million) in big markets (reported by Real Capital Analytics) to my smaller MOB sales (i.e. $1 million) in small markets over the past nine years. From 2002 through 2005, there was an average MOB price difference of only $20 psf between the big deals/big markets and the small deals/small markets.

Over that 2002-2005 period, cap rates for large transactions averaged only 0.6% lower than the small deal/small market prices. But the gap started to widen from 2006 thru 2008, when the big MOB deals averaged $30 psf higher and the cap rates for big deals compressed to average 1.5% lower than the cap rates for the small deals.

There was a striking difference from 2009 through Q2-2010 as big deals in big markets pulled away and averaged $80 psf higher than the small deals in small markets, with the cap rate differential moderating to only 1.1 percent. This condition over the last two years reveals an interesting trend. The more sophisticated investors (like hospital systems) that own big MOB’s in big cities realized that in addition to the other good reasons to sell mentioned previously, the top of market to sell for highest price is actually now, so they are selling.

Doctors predominately own smaller MOBs in smaller markets and are somewhat isolated from the realities of the current favorable market condition for MOBs. They have tended to remain on the sidelines during these last two years believing their MOB values are down like the rest of the real estate market, when in fact the opposite is true.

The majority of small MOB sales over the last two years were mostly distressed, vacant properties that sold at very low prices, creating the disparity of $80 psf between large ($5+ million) and small ($1 million) recorded MOB transactions. This should change, however, in 2011as the gap between large and small MOB deals narrows when doctors in smaller markets realize MOBs have escaped the declines of other segments and that now is one of the best times ever to sell medical office space at strong valuations.

Source: South Florida Hospital News

Medical real estate (MOB) is a sector undergoing some changes, but its future outlook remains stable. As healthcare providers continue to grapple with changes in reimbursement policies, investors are increasingly viewing these assets as more than just alternatives to core real estate sectors, says Lisa Strope, director of research at real estate services firm JLL. “It’s a really good time for healthcare investment,” Strope says. Here are some key updates on the sector from several industry experts.

1. There is a lot of development. And it’s happening across the country, says Mike Hargrave, principal at Revista, a medical real estate research firm. According to Revista’s construction report, the U.S. can expect to see about 22 million sq. ft. of medial office space delivered this year. “That would be really the high-water mark going all the way back to 2008,” Hargrave says.

2. But development is not outpacing demand. This new construction represents just 1.5 percent of existing stock, according to Revista figures. “It’s not like that inventory’s growing at a pace that demand can’t keep up with,” Hargrave says. In addition, very little of this pipeline is made up of speculative construction. Demand for medical office building and outpatient care centers continues to grow rapidly, and supply is keeping pace, says Mindy Berman, managing director at JLL, as technological advancements have allowed more critical medical care to be provided in retail settings and not just hospitals.

3. Construction trends differ geographically. In states including Missouri, Colorado and Texas, new development can happen quicker, whereas in more regulated states, you may see hospitals leasing space in a retail strip, Hargrave says. In some states where there is more land available—like Texas, for example—there is the growing trend of micro-hospitals and freestanding emergency rooms popping up, he notes. “The common thread is the hospitals are in a mad dash to protect market share, to grow market share and to deliver healthcare to the community,” Hargrave says.

4. The “retailization” of medical real estate has been driven by demographics and technology. According to a recent report on the sector from real estate services firm Avison Young, there are around 1,500 to 2,000 mobile clinics around the country, more than 2,000 retail clinics and about 5,600 ambulatory surgical centers. “The concept is that care providers are meeting their patients where they are. With medical offices located in prime retail locations, patients can access care in a convenient spot while running other errands,” Berman says. And the shift from retail to healthcare use is easier than one might think; such facilities tend to have high visibility, easy access and a large floor space, Strope adds. This ongoing “mutation of uses” of medical office space has resulted in part because of the aging of the baby boomer and millennial generations, the latter of which tends to go to the doctor for check-ups and preventative care less, says report author Tula Voutieros, senior research analyst at Avison Young. “You’re really seeing much more flexible open design in spaces, gearing the industry for preparedness of change along with the healthcare industry,” Voutieros says. Meanwhile, technological advances and changes in healthcare reimbursements have also helped to shift services more to out-patient locations—all to help keep healthcare costs down, Berman says. According to JLL’s health care real estate outlook for 2018, 39 percent of the market value for U.S. healthcare real estate is concentrated in outpatient facilities and MOBs; 31 percent is concentrated in hospitals.

5. The sector’s fundamentals are stable. “Operationally speaking, there’s nothing in the fundamentals that suggests that the sector should be heading to a downturn,” Hargrave says. MOBs have posted stable occupancy rates, a trend anticipated to continue. Jll’s report notes a quarterly weighted average occupancy rate between 90.4 percent in the first quarter of 2009 and 92.6 percent in the fourth quarter of 2016, “a mere 200-basis-point spread from recent peak to trough.” Meanwhile, pricing has slowly risen, up an average of 49.8 percent over the past five years.

6. There’s been a shift in who’s buying. Healthcare REITs used to be the dominant force in buying institutional grade class-A medical assets, as they had the lowest cost to capital and the ability to place the highest bids, Hargrave says. “That changed coming into 2018, and really whether it’s the big three REITs or whether it’s the MOB-focused REITs, their cost to capital has gone up,” says Hargrave. This has led a number of institutional-grade private equity firms to view class-A MOB assets as core real estate. “REITs are a little bit less active now than they were a year ago,” Hargrave says. According to JLL’s research, medical office assets have regularly posted a 200-basis-point spread in cap rate over the past five years; yields are anticipated to come in at 6.7 percent this year for MOBs.

Source: NREI

Medical office buildings have long been considered a niche sector, but surging interest among investors and developers is rapidly bringing the asset category into the commercial real estate mainstream. The aging U.S. population—combined with the sector’s long-term, stable returns and resistance to e-commerce—is providing steady tailwinds for MOB demand.

“Medical office buildings are the hottest asset class outside of multifamily,” asserted Louis Rogers, founder & CEO of Capital Square 1031, a Glen Allen, Va.-based real estate investment and management company. “Investors intuitively understand that medical needs increase as we age.”

To Rogers’ point, the 65-and-older segment of the population is expected to increase by 1.7 million in 2018 and by 9.2 million over the next five years, according to CBRE’s 2018 U.S. Real Estate Market Outlook for Medical Office. That is driving short-term and long-term demand for medical services, particularly in markets with high concentrations of older residents (many of them in the Northeast and Midwest) or those with populations that are growing quickly overall as well as skewing older (characteristic of many southern and western metros). That demand should continue, notwithstanding changes to the Affordable Care Act that have created some uncertainty in the healthcare market, CBRE predicts.
In a sign that institutional investors are ramping up interest in the sector, an affiliate of Heitman LLC announced in February that it had acquired a 1.4 million-square-foot, 17-property MOB portfolio. Texas accounts for seven properties and five are in Indiana, with one apiece in New Jersey, Virginia, North Carolina, Illinois and Missouri.
In its deal announcement, Heitman cited the properties’ recent vintage—most date from after 2005—their affiliations with top health systems, and their locations in high-growth markets. Among the assets is the Medical Arts Pavilion in Plainsboro, N.J., which opened in 2012 as part of a new medical campus developed for the Princeton HealthCare System. In January 2018, the MOB became part of Penn Medicine Princeton Health, formed by the merger of the two university healthcare systems.


As the real estate industry enters the ninth year of the current cycle, Rogers noted, the need-based, recession-resistant qualities of medical care offer a safe haven for investors, when prospects for other asset categories may be less certain.
In addition, a shift away from hospital campus-based services, adoption of new technology, health-care job growth and tight market conditions are all boosting demand, explained Andrea Cross, CBRE’s head of office research for the Americas. Since 2000, healthcare employment has jumped 47 percent, compared to 12 percent for employment overall. And it’s projected to grow further, adding nearly 1 million jobs over the next five years, CBRE reported.
Lease terms for MOBs are also typically attractive to investors, as tenants tend to be financially stable customers like physicians or healthcare systems with investment-grade credit. MOB tenants also tend to invest significant amounts of capital in equipment and fixtures, and as a result they are unlikely to relocate merely because a building down the street will save them a few dollars per square foot.


The MOB sector’s healthy fundamentals have also expanded the pool of interested investors. The property type registered a lower peak vacancy rate than traditional office properties during the 2008 recession, according to CBRE. Net absorption has outpaced new supply in 24 of the past 29 quarters, and gross asking rents have been stable, reflecting consistent user demand and long-term leases that reduce tenant turnover.
Medical-office cap rates declined to 6.4 percent in 2017 from 8.3 percent in 2010, according to Stephen Newbold, national director of U.S. office research for Colliers International, while sales volume increased over the same stretch to $11.3 billion from $4.3 billion. The top five markets for sales volume last year were Atlanta, Los Angeles, Dallas, Houston and Chicago.
On the development front, Colliers reports that 16.2 million square feet of medical office space was completed in 2017 and forecasts a modest increase to 20.5 million square feet in 2018. States with the largest pipelines include California (5.4 million square feet), Texas (3.1 million), Florida (2.6 million), New York (4.8 million) and Pennsylvania (1.9 million)—all large states with a substantial older population.
The stable, resilient performance of MOBs is attracting lenders, as well. “The market for acquiring existing properties is very strong, and there is a tremendous amount of capital for stable assets,” said Charles Foschini, a senior managing director at Berkadia. One challenge is the three-year-old High Volatility Commercial Real Estate regulations, which stipulate minimum equity and a maximum loan-to-value ratio in order for lenders to meet a 150 percent risk weight requirement. “The HVCRE rules have made it difficult for all but the strongest developers to get financing,” Foschini observed, noting that pre-commitments from tenants may make it easier for developers to secure funding.
In March 2017, Berkadia lined up a $22.5 million bridge loan to reposition 625 Flagler, a 110,000-square-foot Class A property formerly occupied by Bank of America in West Palm Beach, Fla. FRI Investors, the new owner, plans to reposition the 34-year-old building primarily as medical offices; current tenants include Mount Sinai Hospital and Jupiter Medical Center.


As MOBs gain in popularity, discerning investors cite qualities of tenants and properties that make these assets attractive. “If you have a strong healthcare system, Class A MOBs, whether on or off campus, remain especially compelling,” said Mary Beth Kuzmanovich, national director of healthcare services for Colliers International.
Assets located on or near hospital campuses provide stability because they are convenient for both physicians and patients, and doctors are usually affiliated with the healthcare system, providing an incentive for them to sign long-term leases. As medical services move closer to patients, particularly in suburbs, patients no longer have to go to a hospital for procedures like outpatient surgery, radiation therapy or dialysis. Accordingly, assets in suburban MOBs are becoming more desirable.
Location isn’t the only factor, however. “The investor class has to be very careful to understand who’s in their building and their long-term financial viability to continue to be able to pay their rent and continue to renew and stay in the building,” Kuzmanovich said.
American Healthcare Investors and Griffin Capital Co., the co-sponsors of Griffin-American Healthcare REIT IV, focus more on the tenant than on the asset’s location, said Danny Prosky, a founding principal of American Healthcare Investors. “Healthcare is a growth industry in all 50 states,” he said. “There isn’t any one particular part of the country that we avoid.”
In October 2017, Griffin-American Healthcare REIT IV acquired Fairfield County Medical Office Building Portfolio, comprising two MOBs located in Connecticut. The 80,000-square-foot portfolio is 94.6 percent leased to 15 tenants with an average remaining lease term of more than seven years. The portfolio’s anchor tenants, affiliates of Advanced Radiology Consultants, occupy about 29 percent of the leasable space, and recently extended their leases to 2029.
Source: CPE

Transformation is the major theme driving the business of healthcare delivery in the United States, so it is not surprising that the medical office building (MOB) sector is also seeing fundamental changes. In one foundational shift, the Centers for Medicare and Medicaid Services (CMS) reduced physician reimbursements for certain outpatient services delivered in off-campus hospital facilities.
In a November 2 announcement, the CMS explained, medical practices that perform certain outpatient services in off-campus hospital settings will receive 20 percent less in reimbursements. The move was part of an ongoing shift in the way reimbursements for such services are funded under Section 603 of the Bipartisan Budget Act of 2015.

“CMS believes that this adjustment will provide a more level playing field for competition between hospitals and physician practices by promoting greater payment alignment,” according to a statement from the agency.

That decision is not likely to impact demand for MOBs, experts say. Health care providers are still looking to provide patient services in outpatient facilities as one strategy to stabilize their margins, says Chris Bodnar, executive vice president of the investment properties division at real estate services firm CBRE and a co-lead of the CBRE healthcare capital markets group.

“Either way, health care systems will continue to drive outpatient services,” Bodnar says. “It is a more cost-effective way to deliver services for the hospital and the patient.”

The vacancy rate at MOBs decreased by a modest 10 basis points per quarter between the first quarter of 2010 and the first quarter of 2017, according to the 2017 U.S. Medical Office and Health Care Report from CBRE. Overall, the vacancy rate averaged 8.0 percent in the first quarter of this year, a nearly 300 basis points decline from the first quarter of 2010. Also, in 22 of the 29 quarters before CBRE issued its report, the research firm found that absorption had exceeded the addition of new space.
That consistent decline in vacancy is characteristic of the MOB sector, and has insulated it from the volatility that can be so disruptive to other sectors. But that steadiness also has a flipside, which is flat rent growth. CBRE found that overall asking rents for medical properties it tracks have only moved between $22 and $23 per sq. ft.
MOB tenants tend to set down roots and remain in the same space for long periods of time, mainly to stay close to their patient bases and supporting services, according to CBRE. Also, given the amount of mergers and acquisitions among healthcare groups in recent years, smaller medical office spaces designed for individual and small practices have become obsolete. Larger medical associations require more space, according to Bodnar.

“There is rental growth being driven in newer facilities to accommodate the way healthcare is being delivered in today’s market,” he says.

Liquidity continues to flow in from newer investors, and cap rates are still falling. By the second quarter of 2017, cap rates for off-campus properties averaged 6.3 percent, barely distinguishable from the 6.1 percent cap rates on on-campus, or hospital, properties, according to data from Revista, a medical real estate research firm headquartered in Arnold, Md.

“A lot of people are looking to jump in on new opportunities. That is driving down cap rates,” says Hilda F. Martin, principal of Revista. “Investors want the deals that have not been announced.”

As motivated investors, particularly private equity firms, build the relationships that give them the inside track on attractive deals and step up efforts to make more acquisitions, they are moving into the sector with the backing of commercial banks. One lender in the sector, BMO Financial Group, is increasing its participation and doing so in a more organized way, according to Imran Javaid, managing director of BMO Harris Healthcare Real Estate Finance.

“Hospital systems realize that they cannot be at the hospitals and have the patients come to them,” says Javaid. “That is what’s driving the development of these buildings. They are going out to where people live and work.”

According to Revista, about 20.8 million sq. ft. of MOB space should be delivered to the market in 2017. The amount of completed projects has increased steadily, but incrementally, every year since 2014. Experts expect that to continue in the near term, and not just because the aging population will likely result in higher numbers of patients using the facilities in the years to come. Very little of any space in the sector is speculative, according to Javaid.

“We are not seeing speculative development,” Javaid says. “Absorption has outpaced new supply for a long time.”

Source: NREI

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

can healthcare be retail

Retailers have long learned how to function and adapt to meet their customers’ needs. Competition is fierce and there’s no room for error when it comes to achieving success. Consumers are more informed, connected and empowered than ever before. Thus, retailers have perfected key traits such as branding, standards, speed-to- market, advertising, convenience and site selection. Healthcare systems have much to learn from retail. While they have been laser-focused on delivering exceptional patient care on their primary campuses, they face an onslaught of new challenges as they embrace a retail strategy to expand outpatient services and their ambulatory network.
As healthcare systems add retail locations to improve access, retailers view them as competitors only from a real estate perspective. Traditionally, retailers considered healthcare systems symbiotic partners that could potentially direct new customers to their store. However, in today’s market, retailers are beginning to compete directly with healthcare providers as they add health services to improve access and reach a broader base. Walmart, Target, CVS and Walgreens are just a few that are adding services such as urgent care, lab specimen collection, and even imaging at both new and existing locations. Retail fitness centers are also providing preventive and wellness care to maximize their membership base.
These major retail stores and chains are often found in prime well-established locations with built-in traffic flow and volumes required to succeed. Healthcare systems are now competing with retailers to secure premium locations (i.e., the new corner of Main & Main) where before they only focused on their primary campus and immediate service areas. Competition is coming from all sides and in many ways.


Ambulatory locations, and more specifically primary care locations, are typically a loss-leader for healthcare systems and have been a vehicle to open new market doors and drive downstream specialty revenue and inpatient referrals. As such, business plans are extremely tight as healthcare systems look to minimize losses across ambulatory networks. Outpatient centers have traditionally been developed within medical office buildings (MOBs) or spaces dominated by other healthcare services. MOBs typically have an abundant supply of available space within any given real estate market. This fosters favorable real estate economics and lowers operational costs for the development of new healthcare space.
However, MOBs do not offer the best patient convenience and overall experience when compared to other retail options. Therefore, recent trends have seen healthcare systems focusing on ground floor space, shopping centers, strip malls and even pad sites for single-use facilities to provide an easily accessible and convenient retail experience. Unfortunately, these alternatives often come with a major price tag. An internal CBRE study across three major metropolitan markets shows prime retail space lease rates coming in, on average, 20% to 30% higher than comparable space within an MOB.
The required capital to develop this new space is also higher. Tenant improvement allowances are typically 15% to 20% lower and less core infrastructure is provided when compared to an MOB. These factors have a negative impact on new ambulatory business plans and increase the overall cost of entry as well as long-term operational costs.


Price point matters for consumers in the retail world and it continues to evolve in healthcare as well. The emergence of price shopping and transparency for insurance by consumers, whether through public or private exchanges or traditional products, is having an impact on how consumers are paying for and using healthcare. The most recent signals from the federal government indicate that shopping for insurance is on the rise. Also, dual working households are evaluating cost when deciding which spouse will carry the insurance for the family.
his is not necessarily a new trend, but with the increase in high-deductible plans, families have a choice and are scrutinizing insurance packages more closely. This is driving consumers’ willingness to pay out of pocket and shop for insurance products that will balance out-of- pocket expenses with premiums. Price competition is making healthcare providers focus on efficiencies within their cost model or offer additional services that make up any revenue differences.


Retailers rely on robust analytic platforms to understand consumer behaviors, trends, patterns and opportunities. More data has been created in the past two years than in the entire previous history of the human race. According to SINTEF, 90% of the data in the world today was created over a two-year period and continues to evolve. Understanding how to use and apply this information is an even bigger challenge. Partnering with a healthcare data firm to mine consumer traits such as origin, demographics, payer mix and utilization rates is a key first step to any successful retail strategy.
However, the data alone is not the answer. The true value comes in its application. Healthcare systems must be able to incorporate analytic research into both their overall healthcare strategy AND their real estate strategy (short term and long term). This is where healthcare systems have a significant leg up on their new retail competitors. Retailers cannot rely on downstream revenue sources to support new healthcare endeavors, and they’re slowly learning how complex and challenging healthcare delivery can be.


Standards and prototypes must be developed and implemented to ensure speed to market. Successful healthcare retailers cannot afford to second guess their strategic plan once it has been implemented. Don’t get caught in the trap of customizing each location to appease provider preferences. Competition will quickly take advantage of any lost momentum and capture whatever remaining market share still exists. The best locations will disappear, consumers and patients will find alternate sources for care, and development opportunities will quickly be lost. Discipline is required. There’s a reason that retail outlets are designed and branded in a specific way.


To compete in the retail space, healthcare systems must expand their traditional advertising channels to include social media. Increasing brand awareness and acceptance is more than just a Facebook page. Out-of- the-box thinking must be applied. More and more patients are relying on advice gleaned from the internet for everything, including their health. According to Software Advice, 77% of patients surveyed used online reviews as their first step in finding a new doctor. New healthcare apps and wearable devices are hitting the market every day. Wellness has become trendy as devices have become mainstream and social media has impacted how people track and promote a healthy lifestyle. Systems must ensure their retail strategies encompass solutions geared toward wellness as well as episodic care when ill or injured.


Even though price point matters, retailers have learned that consumers are very loyal if they’re provided with exceptional services and superior outcomes. Studies have shown that 86% of consumers are willing to pay more for a better experience. And given that consumers are likely to have 65 times more retail encounters than healthcare encounters over the course of a calendar year and eight times more outpatient encounters than inpatient encounters, it’s imperative for healthcare systems to invest heavily in customer experience and ensure consistency at all ambulatory and retail locations. Each positive customer experience will firmly reinforce the new retail brand and magnify downstream revenue opportunities.


And don’t forget about virtual healthcare. It should also have a place in a system’s strategic plan. Telehealth applications are beginning to impact consumer utilization and spending habits, similar to the effect of online shopping over the past decade. By 2018, it’s estimated the number of patients using telehealth services will rise to 7 million. While virtual visits may not be covered by insurance, many consumers are opting for this route, regardless of the cost, due to convenience or access to care. An increasing

number of patients are also finding that telehealth visits aid in managing chronic conditions and assist in reducing readmission rates.


As healthcare continues to move away from the central hospital and systems expand their footprint, organization leaders must embrace new technologies and approaches to care delivery. Unheard of in the past, patients are becoming savvy consumers that evaluate service, outcomes and price prior to selecting a provider. And, all the while, competition continues to grow. To remain viable, strategies must be creative, consistent and deliberate. Look to other industries and identify best practices that can be replicated in healthcare. Retail was just the first step. We can only imagine what lies ahead.

Source: BDC