Cap rates in the third quarter of 2021 for the single-tenant net lease medical sector compressed by 55 basis points to 5.95 percent, when compared to the previous year. The overall net lease market (retail, office and industrial) experienced a 23 basis point decrease in cap rates over the same period of time. Strong investor demand for essential net lease properties and an increased investor allocation for medical properties were the primary drivers for the aforementioned cap rate compression within the medical sector.
The net lease medical sector was previously priced at a significant discount to the overall net lease sector since 2017. In the third quarter of 2021, however, net lease medical properties were priced at a four-basis-point premium to the overall net lease sector following a year of significant compression. Lower price point, net lease medical assets provided an opportunity for investors when compared to the net lease retail sector. In the third quarter of 2021, the net lease medical sector was priced at a 15-basis-point discount to the net lease retail sector (5.80 percent). Medical related tenants continue to expand off hospital campuses and into historically retail real estate locations, implementing so called “medtail” strategies including urgent-care concepts. Accordingly, net lease investors that previously focused on retail real estate added this asset class to their acquisition criteria in search of higher yields.
Institutional and private investors continue to seek investment opportunities within the single-tenant medical sector. Long-term leases to the larger credits in the sector (hospital systems and Fresenius/DaVita) will generate the lowest cap rates within the medical sector. 1031s and private buyers are the primary buyers of these assets due to the cap rates associated with these properties.
Investor demand for the single-tenant net lease medical sector will remain strong. The long-term outlook for this asset class combined with the expansion of medtail real estate will create a steady pipeline of property supply for investors. The net lease medical sector will continue to provide investors with protection from e-commerce and inflation as many medical leases have structured rental escalations throughout the term of the lease.
Randy Blankstein is president of net lease advisory firm The Boulder Group.