FEW healthy spots can be found in the ailing real estate market right now, but some big real estate investors are discovering a measure of relief, or at least a better prognosis, in medical office buildings.
Dr. David N. Helfman is part of a physicians’ group that owns medical office buildings in the Atlanta area.
At top is one of Trammell Crow’s medical office buildings in Cleveland. Below, one of Ziegler Healthcare’s in Denver.
The sector, which has an estimated property value of $173 billion, has emerged as a haven of sorts in these uncertain times, for the simple reason that health care needs are largely impervious to economic conditions.
“People will continue to get sick, and they will continue to need facilities to house where they get care,” said Phil Mobley, a vice president at Kingsley Associates, a real estate research firm based in San Francisco. “This, of course, hasn’t escaped the attention of the investment community.”
Indeed, the major players — including institutional investors like pension funds, private firms and real estate investment trusts, or REITs — expect that demand for medical office buildings will only intensify as graying baby boomers require more health care and as insurers and government agencies push doctors to perform lower-risk procedures outside hospital settings.
These days, a number of developers and property managers involved in medical buildings say their businesses are holding up fairly well. “We’re a little bit slower than last year, but we’re still pretty busy; deals are getting done,” said Tommy W. Tift III, the president and chief executive of the HealthAmerica Realty Group in Atlanta, which develops and manages medical properties in the Sun Belt. He hopes to break ground soon on his next development, in Jacksonville, Fla.
Meanwhile, REITs that own medical office buildings, along with senior residences, private hospitals and other health care facilities, continue to add to their portfolios.
Robert A. Rosenthal, the executive chairman of Pacific Medical Buildings in San Diego, said that the Nationwide Health Properties REIT acquired 21 buildings owned by Pacific Medical through a joint partnership with his company in the spring. Nationwide has also agreed to acquire additional buildings from Pacific Medical, he said.
And so far this year, the Grubb & Ellis Healthcare REIT, has acquired 72 buildings nationwide. The REIT has managed to raise more than $500 million in capital since its initial public offering two years ago. “It took us six months to raise our first $2 million,” said Danny Prosky, the executive vice president for acquisitions at the REIT, which is sold privately. “We’re now raising more than that each day.”
Still, the sector, while sometimes characterized as recession-resistant, has hardly been immune from the credit crisis.
“There are a lot of good deals in the market, but the hardest part is securing financing,” said Dr. David N. Helfman, a podiatrist who heads a physicians’ group that owns and operates 14 medical office buildings in the Atlanta area. “Banks are requiring a lot more equity than they used to.”
Nationwide sales of medical office space, in fact, have fallen off, though not nearly as much as the rest of the commercial real estate market and, in particular, the office sector over all. For the 12 months that ended on June 30, sales volume for medical office buildings slipped by around 20 percent from the year-earlier period, according to the latest data compiled by Real Capital Analytics, a research firm in New York. For all offices, the drop was 51 percent, it said.
Sale prices, however, have remained fairly strong. The average price per square foot for medical office space was $237 at the half-year point, up 6 percent from the same point of the previous year, compared with $257 for all offices, up 3 percent, according to Real Capital Analytics. The company said capitalization rates — the industry term for the initial rate of return — have also held steady, at around 7 percent nationwide.
Dan Fasulo, the managing director of research at Real Capital Analytics, says investors regard medical office buildings as “a good hold for a downturn.” At the same time, though, he marvels at what the investment world considers a good performer nowadays. “The fact that I’ve gotten excited about a 20 percent decline signals just how bad the market in general is right now,” he said of the sales volume.
A similar situation seems to be reflected in the performance ofpublicly traded health care REITs, which allow smaller investors to
gain exposure to medical property ownership. Returns were a
negative 10.33 percent this year through Thursday, according to the
National Association of Real Estate Investment Trusts. All property
REITs, however, suffered a 34.76 percent loss, on average, during the
same period, the association said.
“The REITs are not as leveraged” as some other companies, like private equity firms, Mr.
Mobley of Kingsley explained. This is a clear advantage in getting deals done in the
current environment of tight credit. These securities offer a safe dividend yield —
currently averaging 6.59 percent, according to the REIT association — exceeding the
yields on most stocks or bonds.
Medical property also tends to offer a predictable cash flow. “I may not hit a home run
with medical office buildings, but I’m getting steady and predictable” income, said Kevin
O’Neil, the senior managing director of the health care division of the Trammell Crow
Company, which develops and manages medical properties and is a subsidiary of CB
Richard Ellis. “It’s like owning a bond versus a high-tech stock.”
A big draw of medical buildings is the stable tenant base. Doctors and other medical
professionals tend to have long leases — 10 or 15 years, on average — and have renewal
rates of 90 percent or higher, according to building owners. Occupancy rates, therefore,
are also high, typically in the low 90 percent range, owners say.
Many medical offices carry “triple net” leases, in which tenants must pay operating
expenses, like property taxes and insurance premiums, in addition to making certain
improvements to the space. Doctors’ offices often require special plumbing, electrical
wiring and ventilation for their expensive medical equipment, and are more likely to
install special finishes like high-end carpeting and wood cabinets.
“They’re making significant investments, so there’s a good chance they will be renewing
their lease when it comes due,” said Mr. Fasulo of Real Capital Analytics. “The cost of
moving is just so expensive.”
Doctors also prefer to stay put because it helps to retain patients. “Basically, physicians
are in a service industry; you’re only as good as the service you could provide,” said Dr.
Helfman, the Georgia podiatrist. That includes having offices in accessible locations with
ample parking.
Not surprisingly, the most desirable properties, which often fetch premium prices, are
close to hospitals. “All of our buildings are on a hospital campus and connect to a hospital
by tunnel or bridge or covered walkway,” said Mr. Rosenthal of Pacific Medical Buildings.
He said his company’s average tenant-retention rate was 96 percent.
Over the last few years, the trend among property owners has been to offer equity
interests to doctor-tenants. Some building owners are also selling individual office
condominiums to doctors and investors.
Mr. Rosenthal says that some of his tenants have ownership stakes — in the form of
ownership units, each of which costs them $1,000. The typical investment is $50,000 to
$500,000. “If they have an interest,” he said, “they are less likely to leave.”
John Sweet, a managing director at the Ziegler Healthcare Real Estate Fund, based in
Milwaukee, agreed. “We have always made available to physician-tenants in our
buildings the opportunity to be part-owners,” he said, estimating that his tenants over all
hold 5 to 10 percent stakes in some of the company’s buildings. Ziegler Healthcare also
offers investment funds for outsiders — it has three and is putting together a fourth —
that invest in medical real estate. The minimum investment is $50,000 to $100,000.
Dr. Helfman, meanwhile, figures that the ownership of medical office buildings will prove
to be a good long-term investment, especially as the stock market has suffered a steep
decline and managed-care plans are further eroding doctors’ income.
“This gives you retirement,” he said, “When we retire, our physicians are still managing
owners.”
source: ny times
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