PHOENIX—Mergers within the healthcare industry, along with the aging population are factoring into the medical capital markets equation. As for the latter, convenience will be increasingly critical for medical providers as the 65-plus age cohort, which dominates physician’s office visits, increases by 17 million people during the next 10 years. These trends have generated consistent demand for single- and multi-tenant buildings as well as facilities that can be economically converted to easy-access locations, according to a Marcus & Millichap medical office report.
Many owners are quickly capitalizing on higher asset values and selling properties to exchange into other commercial assets type while interest rates remain historically low. Numerous factors impact market pricing for these assets including the location of the property, the financial standing of the lessees, the specialty practice of the tenant, and regional economic and demographic trends, says the report.
In preparation for the upcoming RealShare Healthcare Real Estate conference, professionals will be discussing how the abundance of capital is affecting the market, where the market is heading, the future of pricing healthcare capital availability and allocation, including actual risks for each asset class, with a focus on future allocation goals by class. While it seems that perceived demand is driving development, rather than capital, the availability of capital is supporting the trend.
Luke Lee, vice president, capital markets, Transwestern, tells GlobeSt.com: “There is an abundance of capital from lenders that are aggressively lending on medical office buildings nationally. For institutional quality, on-campus MOBs, life companies are offering extremely competitive terms, while banks are most competitive for off-campus MOBs. When it comes to specialty assets, such as hospitals, as long as there is positive historical cash flow, lenders are still providing competitive debt for those financing opportunities. When it comes to value-add MOBs, bridge lenders are eager to provide capital needed for the acquisition and for lease-up costs. Ultimately, if a buyer has a quality healthcare asset in a good location, it is not a question of whether capital is available, but more so the aggressiveness of the terms a buyer can obtain.”
Brand-new facilities with leases that extend 10 years or longer in strong urban locations trade in the low-6% range, with top-tier assets reaching into the 5% range. The same asset in secondary and tertiary markets trades 100 basis points higher. Assets with leases expiring in less than 10 years can trade in the high-7 to low-8% range. Owners who plan to hold the property with a new, stronger tenant must consider that while benefiting from the strengthened profile, the tenant will have greater negotiating strength and potentially new leasing guidelines that could affect lease renewals, Marcus & Millichap reports.
Darryl E. Freling, managing principal, MedProperties Holdings LLC, tells GlobeSt,com: “There is ready availability of construction and acquisition debt, and more interestingly, the growing interest of institutional equity (that has no prior healthcare real estate investment) in the healthcare real space. With some of the publically traded healthcare REITs on the sidelines, I see acquisitions in the space being dominated by private buyers.”
Office lending in general is still location-dependent. In the office sector, 10-year fixed- rate loans are pricing from 4 to 4.6%, depending on location, property age and tenant mix. Leverage varies from 55 to 75%. Floating bridge loans for stabilized buildings see LTVs starting at 65% and price up to 400 basis points over Libor, while spreads grow wider for assets purchased for repositioning.
Stefan Oh, executive vice president, acquisitions, American Healthcare Investors LLC, tells GlobeSt.com: “It is clear that healthcare continues to be more and more interesting to others not customarily investing in or involved with healthcare real estate and that has certainly been reflected in pricing. The demographic story is compelling, to say the least, but I also believe that as more people enter the space, the broader real estate industry has a much better understanding of the asset class.”
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