By Randy Blankstein
Cap rates in the third quarter of 2017 in the single- tenant net lease medical sector compressed by 25 basis points to 6.25 percent when compared to the prior year. The dialysis sub-sector, which includes tenants Fresenius and DaVita, experienced the greatest compression of 28 basis points. The dialysis sub-sector represented the lowest cap rates in the net lease medical sector of 6.1 percent. This is attributable to the long-term leases with rental escalations that these two tenants frequently exhibit. In the third quarter of 2017, net lease dialysis properties made up more than 45 percent of the overall net lease medical supply.
Despite the attractive long-term outlook for health care due to the aging demographic, the net lease medical sector was priced at a 5 basis point discount to the overall net lease market. This can primarily be attributed to the high concentration of non-investment-grade-rated tenants within the sector. In the third quarter of 2017, non-investment grade tenants comprised some 68 percent of the total tenant base.
The lower price points associated with properties in the net lease medical sector make these properties a popular acquisition option among private and 1031 investors. In the third quarter of 2017, the median price of net lease medical properties was some $2.7 million. In 2017, private and 1031 investors were the buyers of 66 percent of the net lease medical properties sold. Additionally, many net lease medical properties have rental escalations in their leases, providing investors with an inflationary hedge.
The single-tenant net lease medical sector will remain active into 2018, as investors remain attracted to the long=term outlook for health care-related properties. The net lease medical sector continues to draw in investor interest due to the increasing aging population of the country and the sector’s resistance to e-commerce. Net lease medical properties will be a viable alternative to retail investments, especially to private and 1031 buyers with lower price point acquisition requirements. Investors across all profile types will continue to acquire net lease medical properties due to their attractive cap rates compared to the overall net lease sector.