U.S. Demographic Trends Strongly Favor Medical Office Real Estate

The dislocation caused by COVID impacted all areas of life and transformed work and leisure for tens of millions of Americans.

The health crisis also prompted an unprecedented population shift over the past two years, which along with an accommodative Federal Reserve, stimulus payments, and a buoyant stock market contributed to a dramatic rise of residential real estate prices in the United States.

The availability of remote work, a tight labor market which shifted power to employees to demand more flexible work arrangements, escape from strict pandemic-related public health measures, a general interest of people to move to a warmer climate, more tax-friendly locations, with better job and salary prospects, a buoyant stock market that lifted household wealth and, of course, rising home prices, and a frantic search for a shrinking inventory of affordable homes all contributed to an unprecedented population shift over the past couple of years.

These trends also favor another area of real estate favored by sophisticated individual investors and institutions, healthcare real estate.

“Before the pandemic, the healthcare sector was characterized by long-term leases, stable occupancy, consistent income streams and quality tenants with stable, long-term leases and high credit ratings,” says Martin Freeman, OrbVest CEO, “as the pandemic recedes we see even more reason for long-term optimism for individuals and institutional investors considering opportunities in this sector.”

OrbVest is a global real estate company investing in income-producing medical commercial real estate in the United States, and is one of a growing number of companies looking to capitalize on the growth and potential of US healthcare real estate.

What Are The Trends?

The National Association of Realtors recently highlighted metropolitan areas in the Sunbelt and Mountain states that saw the highest yearly price gains: Punta Gorda, Fla. (28.7%); Ocala, Fla. (28.2%); Austin-Round Rock, Texas (25.8%); Phoenix-Mesa-Scottsdale, Ariz. (25.7%); Sherman-Denison, Texas (25.1%); Tucson, Ariz. (24.9%); Las Vegas-Henderson-Paradise, Nev. (24.7%); Ogden-Clearfield, Utah (24.7%); Salt Lake City, Utah (24.4%); and Boise City-Nampa, Idaho (24.3%).

Chicago, Milwaukee, New York City, and San Francisco all saw a population decline during the pandemic because of fewer jobs and unfavorable demographic trends.  In 2021, New York, California, and Illinois each lost over 100,000 people to outmigration.

According to Redfin, a record 32% of users nationwide were looking to move to a different metro area during the first quarter of 2022.

The 2021 U.S. Moving Migration Patterns Report from North American Moving Services also showed that Illinois, New York, California, New Jersey, and Michigan were the top five states for outbound moves, while Idaho, Arizona, South Carolina, Tennessee, North Carolina, Florida, Texas, and Utah were the top states for inbound moves.

Redfin noted the top 10 places where Americans are considering moving include: Miami; Phoenix, Las Vegas; Sacramento; Tampa; Dallas; Cape Coral, Fla.; North Port, Fla.; San Antonio; Atlanta.

The Marcus & Millichap multifamily market forecast primarily reflects these statistics and trends. The company specifically cited that the Sunbelt and Mountain regions should thrive. Even before the pandemic, the Sunbelt saw significant in-migration, household formation, and employment growth. During the pandemic, this region saw fewer job losses, mainly due to public policy regarding restrictions. The Mountain region is also seeing momentum thanks to rapidly growing populations, a strong quality of life, and affordable living costs.

Let’s take a deeper look at what could be driving these migration trends.

COVID-19

A Pew Research Center study conducted in June 2020 found that over a quarter (28%) cited COVID-19 as a significant driver for why they moved. Many people relocated due to fear of catching the virus while others moved to escape restrictions.

A worldwide pandemic would not have necessarily been a migration driver pre-2020. However, the pandemic indeed exposed a divide between how to handle the pandemic. Blue states such as California, New York, and Illinois had some of the harshest coronavirus restrictions. Michigan also saw significant out-migration due to the collapse of the auto industry and COVID-related public policy. Red states, on the other hand, such as Texas and Florida, kept their conditions largely open. This undoubtedly led to a short-term migration driver for people seeking to earn a living and escape restrictions.

Take New York City, for example.  In March 2020, there was a 256% increase in people moving out of the city compared to the same month in 2019. Between March and August 2020, 246,000 people filed a change of address request- an almost 100% increase compared to the same period in 2019.

Remote Work And Learning

Somewhat related to COVID and its shutdown restrictions, the rise of remote work and learning has been another driver for migration. Many students could also be taking advantage of online learning to save money on housing and living expenses.

Climate

The 2020 U.S. Moving Migration Patterns Report noted that the Northwest and Midwest were the regions in the U.S. experiencing the most outbound migrations. Harsh winters are certainly a contributing factor. Meanwhile, the same report cited climate and open space availability as reasons for southern states experiencing great inbound migrations.

According to Moving.com, the weather is the number one reason people move to Florida, for example. Despite hot and humid summers, the state has about 200 sunshine-filled days a year and seasons that tend to be mostly mild and warm. Average winter temperatures also appear to range between the 60s and 70s.

Not every state can boast the same climate that Florida has. However, other places in the Sunbelt and South have mild temperatures of their own that might be contributing to the amount of inbound migration.

Job Growth/Availability

In the Pew Research survey we previously mentioned, a total of 18% gave financial reasons, including job loss, as their motivation to relocate. This driver is also correlated with COVID-19 and policy restrictions. While states hit hardest by restrictions and job losses saw the most out-migration, those who stayed relatively open and kept their job market afloat saw the most in-migration.

Multiple sources and indications show that the Sunbelt, the South, and the Mountain regions are the best locations for job opportunities and job growth.

According to U.S. News, the Top 5 states for job growth are as follows: That’s 2 Sunbelt states, 2 Mountain states, and 1 Southern state.

Other data corroborates this too. According to the Seidman Institute, Idaho was the ONLY state in the U.S. to experience year-over-year job growth for total nonfarm payrolls in January 2021 and is leading year-to-date too.

4 of the Top 5 states leading in job growth based on a 12-month moving average are also all Mountain states: Idaho, Utah, Arkansas, Montana, and South Dakota.

This interactive map from the WorldPopulationReview depicting “Job Growth by State 2021” seems to expand on this data. Notice which regions of the country are lighter shaded (less job growth) and which areas are darker shaded (more job growth).

Income Tax/Affordability

“An income tax increase in a state may cause individuals to out-migrate over time,” says the Cato Institute.

Because of the economic hardships that many Americans have faced, the correlation between state income tax rates, affordability, and migration is not coincidental.

3 of the Top 8 states for in-migration- Florida, Tennessee, and Texas- do not collect state income tax. Meanwhile, other top states for in-migration, Arizona, North Carolina, and South Carolina, have a minimal state income tax.

While growing Mountain States, such as Idaho, do have state-income tax, Mountain States are generally more affordable and have a slower life pace. Compare that to states such as California, New Jersey, and New York. All three of those states are in the Top 5 for most out-migration, and unsurprisingly, their state income tax rates are 13.3%, 10.75%, and 8.82%, respectively.

Impact On The Healthcare Industry

The Sunbelt, South, and Mountain regions have experienced the most in-migration. It is not a coincidence that these regions are also seeing the highest volume of medical office sales.

Medical office sales volume totaled $19.6 billion in 2021 a 40.1% increase from 2020, a significant increase from prior years’ sales ranges of $13 to $14 billion.

The five states with the most MOB square footage under construction are California, Florida, and Texas, New York and Ohio.  The same five states also top the list of hospital construction activity.

Houston, Texas is the leading metro market for construction, and other Sun Belt areas like Orlando, Miami, and Atlanta are all in the top 10.

There is a direct correlation between healthcare real estate, demographics, and migration. Sunbelt states have seen investor interest in medical office buildings due to pleasant year-round climates attracting aging boomers and young families seeking to enjoy better weather and a more active lifestyle.

You have to consider the cost of living and the cost of healthcare as well. For the younger population, it is much more affordable to raise a family in the Sunbelt and the South compared to New York City and San Francisco, especially when you consider the cost of healthcare.

For our aging population, consider the essential needs for affordable and convenient healthcare as the 80+ demographic is growing quickly, and outspending every other age on healthcare combined.

The 65-and-older population has increased from 12.8 percent of the population to 16.1 percent. By 2030, it may comprise more than 1/5 of the U.S. population. This has a direct and critical impact on healthcare. According to data from the 2010 Census, more than two-thirds of people in this age group (66.5 percent) see the doctor three or more times a year, up from less than half of those aged 46-64 (44.2 percent).

For one example of how demographics provide a tail wind for  segmented and specialized healthcare facilities, look to South Florida, home to the highest concentration of seniors in the country, with more than 3.3 million Floridians aged 65 and older, and 1 in 20 now 80 years old or older.

Migration and Demographics Fueling Medical Office Building Boom

We are witnessing a boom in the medical office building (MOB) real estate market.  MedCraft Investment Partners announced the launch of a $500 million joint venture for medical office acquisitions, and, Kayne Anderson Real Estate is getting ready to close a $2.5 billion fund of which approximately half will be allocated to medical offices.

In 2021, 280,000 square feet of medical office space was absorbed – a 77% increase from 2020, according to JLL.  medical office vacancy down two basis points to 5.8%, the lowest levels since 2006 and medical office rents rose 5.5% in 2021, according to JLL.

Average net asking rents for MOB space increased by 1.7% in 2021 to $22.61 per square foot — setting a new high for the sector, according to Colliers.

Companies with a track record for success like OrbVest, are able to navigate this competitive marketplace and are attracting a great deal of interest from individual and business investors around the world seeking dollar dividends and an inflation-resistant asset in times of volatility.

“We are mindful of the increasingly competitive market for prime assets and are constantly re-assessing and adjusting OrbVest’s business model to match evolving market conditions,” says Freeman. “We are fortunate that OrbVest is able to leverage the relationships it has built up with brokers and providers of these assets so we can continue to secure almost 75% of our deals off-market, providing a sustainable pipeline to meet investor expectations.”

Key Takeaways

For healthcare real estate, demographic shifts and population migration trends go hand in hand with location and its correlation to healthcare real estate trends.

America is rapidly changing and graying.  Our population is not only aging but also taking into account quality of lifestyle more than ever before.  Young families want a more affordable, lower-stress and higher-quality lifestyle. Seniors want to enjoy a better climate with affordable and convenient healthcare integrating with their lifestyles. These migration trends preceded the pandemic, but the pandemic accelerated these trends.

If you’re considering investing in healthcare real estate, consider how demographic changes, migration, and how people’s location preferences directly correlate with healthcare properties.

Suppose you can look into crystal ball not 5 years into the future but 10+. In that case, you can unlock a historically strong investment opportunity in medical office buildings and healthcare real estate.

“We believe that healthcare-related commercial real estate in the U.S. should continue its growth as an ageing population and technological progress drives increasing demand for these specialized buildings. We are very excited to be executing successfully in this rapidly growing space,” says Freeman.

 

Source: Global Banking & Finance Review

Hospitals Buying Real Estate, Revamping Clinical Space For Innovation Hubs

In February, Pittsburgh-based Allegheny Health Network held a ribbon-cutting in Bellevue, Pennsylvania, to unveil a home for one of its newest ventures—AlphaLab Health, which the system hopes will spur innovation and improvements to community health.

The 10,000-square-foot innovation hub, a partnership with Pittsburgh-based startup incubator Innovation Works, is housed in a former hospital owned by AHN. It will serve as the home base for startups participating in AlphaLab Health, AHN’s healthcare and life sciences startup accelerator launched in fall 2020.

“It’s a demonstration of what you can do to repurpose these assets that are aged but have great bones,” said Dr. Jeff Cohen, AHN’s chief physician executive for community health and innovation.

The space gives AlphaLab Health startups access to wet and dry labs to develop products, as well as office space and areas to collaborate and meet with other startups. The startups also receive early-stage funding and opportunities to connect with clinicians and test products at AHN.

The project has involved more than two years and $5 million, including renovations and investments in startups and programing—of which AHN and its parent Highmark Health contributed $2 million.

“Accelerators and other innovation centers became more popular during the COVID-19 pandemic,” said Pam Arlotto, president and CEO of healthcare consultancy Maestro Strategies.

While hospitals have been setting up innovation programs for years, the efforts took on a new focus as the healthcare industry eyed consumerism and pushed to create new care models that engage patients at home and outside of the hospital. They’re expensive projects, usually involving investments in real estate and hiring staff to run the programs.

“Hospitals starting innovation centers have done everything from revamping old clinical or administrative space to building new facilities to house innovation programs,” said Rob Lowe, CEO of Wellspring, a software company that sells products for innovation and research and development programs. “It depends what type of work the hospital needs to do or the form of the incubator itself. Some hospitals create accelerators to identify startups worth partnering with or venture capital arms that invest. Some, like AHN’s, are partially funded through local government as part of economic development efforts. Almost in all cases of these hospitals that we work with around the U.S., we see dedicated space.”

A Hospital Makeover

The vision for AlphaLab Health started in 2019. Cohen, then president of the system’s Allegheny General Hospital, wanted to embark on a community health project. He requested that the health system let him start an accelerator at a nearby facility that Allegheny General was responsible for—a 240,000-square-foot facility about 6 miles away in Bellevue, which closed its inpatient units and emergency department in 2010.

The hospital, formerly AGH Suburban, had transitioned into a nursing facility, but that closed in 2019. AHN continues to operate an urgent care center and outpatient clinics at the facility. It required significant renovations to become AlphaLab Health.

The facility’s intensive-care units were transformed into lab space, patient rooms turned into office space, and waiting rooms became conference space. Startups aren’t charged rent while participating in the accelerator but can choose to continue to rent office space from AlphaLab Health after the six-month program comes to an end.

Cohen is curious whether this model, should it prove successful, could be used in other regions. He said many hospital closures have left vacant facilities in poor areas. In rural areas alone, more than 181 hospitals have closed nationwide since 2005, according to the North Carolina Rural Health Research Program.

But initiatives like AlphaLab Health could help turn around that blight by creating jobs in underserved areas, lifting community health and improving medical care with new innovations. Jobs could serve to decrease the cost of care, since research has suggested employment is a social determinant of health.

To renovate the former hospital, AlphaLab Health raised funds from government, philanthropy and AHN’s parent company Highmark Health. The funding included a grant from the Pennsylvania Department of Community and Economic Development, which will reimburse $500,000 in construction costs from its Redevelopment Assistance Capital Program. More than 181 hospitalshave closed since 2005 in rural areas alone, according to the North Carolina Rural Health Research Program.

Each startup also receives up to $100,000 in funding—half of which is provided by AHN, and the other half from Innovation Works. AlphaLab Health retains 2% equity. AlphaLab Health accepted its first class of seven startups in 2020, six startups in 2021 and received more than 100 applicants each year.

AlphaLab Health is tracking a few metrics to gauge success, including follow-on funding that startups receive after the accelerator. Already, five of the first 13 startups have raised an estimated $10 million in additional funding, Cohen said. Six companies have started tests of their products and five have hired at least one new local full-time employee.

“We’ve been very early, but so far we’re very pleased with the direction of where this is going,” Cohen said.

Spinning Off Innovation

Milwaukee-based Froedtert and the Medical College of Wisconsin launched Inception Health, a program that develops innovations and evaluates digital tools in the market, seven years ago. It’s a separate company owned by Froedtert and MCW, housed in a 10,000-square-foot office space in the health system’s North Hills Health Center.

“The office was previously used for outpatient ambulatory services but was revamped to be a classic innovation space,” said Cathy Jacobson, Froedtert’s president and CEO. “The team needed dedicated meeting areas, since it’s often bringing in external partners and vendors. It couldn’t just be a conference room buried within a hospital. Inception Health was set up as a limited-liability corporation owned and funded by Froedtert so that innovative ideas wouldn’t have to compete for resources with the traditional health system.”

Inception Health’s projects must align with challenges and goals outlined in Froedtert’s strategic plan, such as patient access, consumer experience and population health. The company’s board is made up of C-suite executives from Froedtert and chaired by Jacobson. Inception Health’s annual budget has increased over the years, from roughly $2.5 million in 2015 to $10 million.

“The board evaluates return on investment across the portfolio rather than for individual projects, according to Jacobson. “That factors in care quality and consumer access improvements. We want the ability to experiment and fail.”

Inception Health doesn’t sell services to other health systems. It does have one hospital that pays to be a partner, which means it’s able to deploy tools that Inception Health has developed and assessed. Inception Health is working to onboard another hospital partner.

“Froedtert is still fine-tuning how to design innovations with full-scale deployment in mind, beyond the initial pilot or experiment,” Jacobson said.

While Inception Health’s charter is to develop innovations, it doesn’t implement them. That’s handled by Froedtert’s operations team. Once an innovation is developed, Froedtert’s team will work with Inception Health to pilot the new product or process at the health system. But Jacobson said leadership has realized they need to build up that implementation capacity and dedicate more staff to scaling an innovation across the health system after a successful pilot, similar to how IT workers home in on EHR work during a go-live or upgrade.

“You always staff an EHR implementation,” Jacobson said. “We weren’t doing it with the same rigor with Inception.”

Creating a business plan with next steps for after product development and piloting technology is critical for a successful innovation center, said Ash Shehata, national sector leader for healthcare and life sciences at consulting firm KPMG. That could include how to scale it across the health system for an internal return on investment, as well as considering whether to commercialize the intellectual property and sell to peers.

“Without that business plan, it’s easy to get stuck in a prototype phase,” Jacobson said.

A Pandemic Shift

Cedars-Sinai in Los Angeles has run a startup accelerator since 2016 to connect with early-stage companies.

“The Cedars-Sinai Accelerator provides an entry point for the health system’s work with startups,” said Jim Laur, vice president of technology transfer and business affairs at the system.

It’s a three-month program in which startups work with hospital staffers who have identified problems to develop possible pilots. Cedars-Sinai has hosted seven accelerator cohorts with about eight to 10 startups in each.

“Usually, each class has at least two or three startups that end up launching a pilot and subsequently providing services to the health system,” Laur said.

The accelerator is hosted in the Cedars-Sinai Innovation Space, a two-story, 10,000-square-foot building across the street from Cedars-Sinai Medical Center. Being across the street was important for the accelerator, making it easy for startup founders to walk to the hospital to talk with staff and see workflows in action.

“We thought it would be good to have a space that’s on its own for a specific purpose … while still being just across the street,”  Laur said. “People can still connect really easily.”

It’s a repurposed building that was originally a retail space, which meant Cedars-Sinai had to do some minimal renovations, like taking out the store counters and putting in conference rooms.

“The goal for the Cedars-Sinai Accelerator is to bring solutions to clinicians and business leaders at the hospital,” Laur said. “It’s not expected to drive a financial return for the health system.”

Laur’s team has found ways to measure the accelerator’s performance and whether it’s succeeding in identifying high-impact startups. The team tracks the number of employees that a startup has before and after the program, to see whether the company has grown. They also track funding the company raises after the program.

Cedars-Sinai took a break from using the innovation space during the COVID-19 pandemic, when the accelerator shifted to a virtual model. During that time, the building was used to create supplies like hand sanitizer and face shields during shortages.

Moving forward, the accelerator plans to take some lessons from the pandemic. Leaders are looking to maintain a virtual option for startups that may not be able to relocate, only bringing them to Los Angeles for a portion of the program focused on things that are hard to replicate remotely, like walking through the hospital floors. It will continue to offer educational sessions virtually, which leaders hope will create opportunities for entrepreneurs with families or other responsibilities that make it challenging to move for three months.

“We’re able to now accommodate a broader range of individual circumstances,” Laur said. “It’s really been an exciting refresh for the program.”

The pandemic’s push toward more remote and hybrid work could lead to more innovation centers, KPMG’s Shehata suggested. As organizations downsize office space where back-office employees used to work, that space will need a new purpose.

“Health systems need to reconsider what they want to do with it,” Laur said. “They could offload it to reap the savings or transform it into something new.”

Building From The Ground Up

Peoria, Illinois-based OSF HealthCare has operated a 168,000-square-foot innovation center, dubbed the Jump Trading Simulation and Education Center, since 2013.

“It was new construction,” said Dr. John Vozenilek, vice president and chief medical officer for innovation and digital health at OSF HealthCare.

Jump Simulation, which cost an estimated $55 million to build, is attached to the system’s St. Francis Medical Center in Peoria The building was funded through a $25 million donation from trading firm Jump Trading, as well as private donors and OSF HealthCare. It’s a partnership with the University of Illinois College of Medicine at Peoria.

The building’s first two floors comprise simulation spaces, including an operating theater, inpatient and outpatient settings, and a home environment with an ambulance used for medical training, The floors above are innovation spaces, where teams of engineers and clinicians design and build solutions—and then test them in the simulation spaces below. The innovation spaces house seven labs focused on research and development for topics like children’s healthcare, data science and informatics, and advanced imaging and modeling, among others.

OSF HealthCare’s Jump Simulation innovation hub houses a simulated operating theater and inpatient and outpatient settings for medical training.

The labs often work with external partners who have expertise in their given focus area, as well as professors and students from nearby universities.

“The labs almost serve as a beacon, letting outside experts know that this is an area OSF HealthCare is investing in and is interested in expanding,according to Vozenilek. “That’s really accelerated our whole process. For the model to be successful, the work in the lab can’t just stay there. It has to be translated back into hospital operations or patient care,’OSF leadership monitors the labs’ progress based on whether they’re producing new ideas and the extent to which those ideas are getting disseminated into the hospital and throughout the industry.

“The vision behind Jump Simulation is to improve outcomes and cut costs through innovative training, as well as finding better ways to perform clinical care,said Dr. Lisa Barker, chief medical director at the Jump Simulation center. “To demonstrate the value of Jump Simulation’s work to health system leadership, the team often measures ROI based on cost avoidance. That includes figuring out how programs at the center contribute to reductions in medical errors and complications or creating efficiencies when onboarding new medical professionals. Not only do we have a qualitative impact, but we can have a tangible benefit as well.”

 

Source: Modern Healthcare

Medical Office Building Sales Are On A Record Pace

Prior to 2021, the high-water mark for medical office building (MOB) sales in any given year took place in 2017, when the volume was $15.5 billion, according to information provided by healthcare real estate (HRE) data firm Revista.

During the next three years, that figure was not threatened at all, with the next highest volume during that time coming in at $12.6 billion in 2018. But then came 2021, a year in which many professionals involved in the sector say there was pent-up demand in the MOB sales sector as the country – and the world, for the matter – was doing its best to put the COVID-19 pandemic in the rearview mirror. What happened in 2021 was quite remarkable, with the MOB sales volume shattering the all-time record and totaling $18.3 billion, or 15.3 percent higher than in 2017.

This statistic was presented April 21 during Revista’s First Quarter (Q1) Subscriber Webcast, during which time two of the firm’s principals and founders, Mike Hargrave and Hilda Martin, presented a wide variety of data concerning the MOB space.

The big increase in volume in 2021 was, as noted earlier, due to pent-up demand for acquiring the product type as the pandemic continues to wane. It was also a testament to the strength of the product type, which has proven once again to be a solid investment despite the many headwinds brought on by the pandemic and a number of obstacles facing most business sectors, such as rising prices for all types of goods, materials and labor; increasing interest rates; labor shortages; supply chain difficulties; and other challenges.

Two of the ways in which MOBs have shown their strength is in the nationwide absorption and occupancy rates. According to Revista data, Q4 2021 saw the strongest MOB leasing activity since 2018, with 6.2 million square feet “absorbed across the top 50 (metropolitan areas of the country),” according to Mr. Hargrave. At the same time, the occupancy rate in the top 50 metropolitan areas rose to 91.8 percent by Q4 2021, he noted.

In addition, during the earliest days of the COVID-19 pandemic, when many industries were shut down and elective procedures and surgeries were put on hold in most states throughout the country, owners of MOBs widely reported that their rental collection rates remained in the high 90 percent range, solidifying the product type’s status as a strong investment during difficult times.

During another event March 2-4, the Revista Medical Real Estate Investment Forum 2022, which was held at the Loews Coronado Bay Resort, Mr. Hargrave said “The record-setting sales volume in 2021 is representative of the pent-up demand we all heard about coming out of the pandemic, what with all of the new interest in this space and all of the new capital coming into the MOB market. And, sure enough, that unfolded in the second half of 2021. We could see this continue in 2022, but we’ll keep our eye on that.”

Indeed that strong velocity has continued into the early part of 2022, according to Revista. During its most recent subscriber webcast providing Q1 statistics, Revista presented data showing that Q1 2022 saw sales of $3.8 billion, which is a preliminary figure that is likely to increase as more transactions are discovered and recorded by Revista.

That Q1 volume is the second highest volume for an opening quarter of any year on record since Q1 2017 and it represents a 90 percent increase from the sales volume recorded in Q1 2021, which, of course, turned out to be a record-setting year.

“This is preliminary data,” Mr. Hargrave said during the webcast. “So, that figure will increase, as we’re still cataloguing transactions that occurred within the first quarter.”

With such a strong volume to kick off 2022, Revista’s data indicates that MOB sales have topped $20 billion in the past 12 months (April 1, 2021 to March 31, 2022), the largest volume for such a time frame “we’ve seen since we’ve been tracking transaction activity.”

Could 2022 Set Another Record?

Even after a record-setting volume in 2021, some predict that 2022 could see another record for MOB sales. The HREI Editorial Advisory Board (EAB), which represents many of the sector’s top firms, met March 29 in Nashville, Tenn. One of the board members is Christopher R. Bodnar, vice chairman of the U.S. Healthcare and Life Sciences Capital Markets team with CBRE Group Inc.

“I think it’s definitely possible (that MOB sales in 2022 could top that of 2021),” Mr. Bodnar said. “The first quarter of 2021 was pretty slow for us and then we ramped up quickly with most of our activity in the second half of the year. For the first quarter of this year, (CBRE) has already transacted on $4.2 billion in deals. This has been a record quarter for us, personally, but if this activity continues, (the sector should) be able to eclipse the numbers achieved in 2021.”

Erik Tellefson, a managing director with Capital One Healthcare in Chicago, agreed with Mr. Bodnar.

“At this point, I would expect medical office transactions to exceed even the volume in 2021,” Mr. Tellefson said. “That was a high-water mark… But borrowing costs remain relatively low, and I think the industry still orients to the private buyer, developer, private equity firm, balance sheet, bank debt. So that bodes relatively well for the industry.”

John R. Smelter, senior managing director of White Oak Healthcare MOB REIT, said he, too, remains bullish on the MOB and HRE sector.

“There are certainly a lot of reasons why so many investors are getting into this space,” Mr. Smelter said, “because of the stability of our sector as compared to other sectors that have certainly not fared so well, especially during COVID-19.”

Indeed, a wide variety of deep-pocketed investors, including institutional investors, continue to enter the space by acquiring MOBs. Many are doing so through the formation of joint venture (JV) partnerships with long-standing HRE firms that own portfolios of MOBs. In many cases, a JV is often launched with the recapitalization of a portfolio of MOBs owned by the HRE firm in which the new investor acquires a large portion of the ownership. The HRE firm typically retains a smaller percentage of the ownership.

Pricing Remains High, Too

With demand continuing to increase for MOBs from a wide variety of investors, it should come as no surprise that pricing remained high and capitalization (cap) rates, or expected first-year returns, remained low during the year.

For 2021, according to Revista’s data, the median cap rate was an all-time low of 5.7 percent on a trailing 12-month (TTM) basis. Of course, many deals involving the highest-quality properties with credit-rated tenants saw cap rates significantly lower than that, as transactions with cap rates in the lowest 75th percentile of all deals averaged 5 percent. MOB transactions in the highest 25 percent of deals, or those considered value-add transactions, averaged 6.7 percent in 2021 on a TTM basis.

“With increased transaction activity or increased volumes comes more competition for assets, obviously, and increases in prices and resulting compression in cap rates,” Mr. Hargrave said.

However, with 2022’s economic outlook quite different than in recent years – what with inflation on the rise and the U.S. Federal Reserve Bank indicating that it plans to increase borrowing rates multiple times in coming months – Mr. Hargrave said the folks at Revista often get asked where they think cap rates are heading.

“We tell people that MOB cap rates, historically, have not moved with changes in interest rates, instead they typically move with transaction volumes,” Mr. Hargave said. “In recent years, the lowest cap rates (were) in 2021, which had the largest sales volume ever recorded, and in 2017, which, oh by the way, had the second largest volume ever. This could mean that for cap rates to rise materially, we’d probably need to see the total MOB sales volume come down.”

During the HREI board meeting in March, several board members said they believe that with all of the headwinds facing the economy and rising interest rates, cap rates could level off, if not increase ever so slightly.

Devereaux A. “Dev” Gregg, executive VP of development with Charlotte, N.C.-based Flagship Healthcare Properties, said he believes cap rates will “stabilize” in the next year or so. Flagship is both a developer and, through its private REIT, Flagship Healthcare Trust, a buyer of HRE facilities.

“What I don’t see cap rates doing is going down,” Mr. Gregg said. “I don’t necessarily see them ‘jumping up’ either, but at the least trend of having cap rates continue to compress, in my estimation, is at least going to slow down.”

Richard M. “Rich” Rendina, chairman and CEO of long-time HRE development firm Rendina Healthcare Real Estate, which is based in Jupiter, Fla., said he agrees that cap rates for MOBs will stabilize in the next year or so. In addition to developing HRE properties, Rendina has become more focused on acquiring assets since forming a programmatic JV partnership with Chevy Chase, Md.-based Artemis Real Estate Partners in 2021.

“I feel like cap rates — we mentioned that 5.7 percent average – and I’m guessing that will stabilize somewhere between that and maybe 5.5 percent,” Mr. Rendina said. “Even so, there is still the potential for more compression of cap rates when it comes to core assets. I’m hopeful that assets will be priced according to what asset class they fall into, be they value add, core-plus or core, instead of seeing all of them being priced as core. And I do think that will start to happen.”

 

Source: HREI