Net Lease Investors Eye Medical Office

By Keat Foong, Finance Editor

Medical offices still constitute a small portion of the net lease space, but some industry participants see these assets slowly gaining in popularity and rising in profile, especially in the past few years, as a viable investment alternative in the sector. The fundamentals of healthcare real estate are considered as sound as, if not even stronger than, retail. Unlike retail, medical office assets can be viewed as being more “Internet-proof” and recession-resistant. And medical office tenants are said to be relatively stable, staying in place for a longer time as they sink huge capital investments into the space in the form of equipment.

“The asset type is becoming more mainstream by the day,” said Randy Blankstein, president of The Boulder Group. In the past, he said, healthcare properties were looked upon as more of a specialized investment.

Toby Scrivner, director of the healthcare property group at Stan Johnson Co., reported that cap rates have compressed by about 8 to 10 basis points over the past 12 months for multi-tenant medical office. Cap rates for single-tenant medical office are currently said to be stable. Blankstein said that caps for the product type currently are averaging in the 7.5 to 7.89 percent range. And at 11.5 percent, the vacancy rate for medical office in general has fallen 70 basis points from its high point in 2009, though it remains 140 basis points above pre-recession peaks, according to a medical office research
report from Marcus & Millichap Real Estate Investment Services.

Despite vicissitudes in the short-term numbers, in the longer run the properties are expected to benefit from the aging of the Baby Boomers, which will lead to a greater use of medical services. As Marcus & Millichap pointed out in its report, the over-65 population will expand by 36 percent over the next 10 years, and individuals in this age group normally require almost double the number of medical visits compared to other age groups. Even in the medium term, the healthcare sector has consistently run above-average job creation numbers, showing a 2.2 percent gain in 2011, noted Marcus & Millichap.

Added to the strong positive demographic trend, the Patient Protection and Affordable Care Act, which was recently ruled constitutional by the Supreme Court, can only be seen as a plus for the healthcare industry. According to Marcus & Millichap, the current legislation will add 32 million individuals to the ranks of those with healthcare coverage and result in the need for an additional 62 million square feet of medical office facilities by 2014.

This article was adapted from Mainstreaming Medical,” a larger article that will appear in the August 2012 issue of Commercial Property Executive.