NREI Research Series
Part 3: The Rise of Medical Office

Part 3: The Rise of Medical Office

Respondents to the survey work across the spectrum of net lease property types. The most prevalent net lease property type identified was “miscellaneous retail” (49 percent). That was followed by restaurants/fast food (44 percent), office (42 percent), medical office/health care (41 percent), industrial (39 percent), bank/financial (34 percent), drugstores (33 percent), convenience store/discount (31 percent), grocery stores (25 percent), auto (24 percent), government (16 percent) and fitness (15 percent).

In terms of those property types, respondents ranked medical office/healthcare as having the best outlook, giving it a score of 3.9 on scale of 1 to 5. That was followed by industrial (3.7), grocery, convenience store/discount and drugstores (all at 3.6). But, generally, the outlook for all net lease property types was fairly consistent. Every sub-sector ranked between 3.9 and 3.1.

Those results roughly match what respondents said were the property types in the greatest demand. Both drugstore and medical office/healthcare scored 40 percent on that question. Those two subsectors were followed by restaurants/fast food (34 percent), industrial (24 percent), grocery stores (23 percent) and convenience stores/discount (17 percent). Auto and fitness tied for the lowest score at 6 percent each.

A lot of these medical facilities, including specialty surgery centers, urgent care clinics, dialysis clinics, plasma centers and oncology centers, are being introduced to the market to offer greater accessibility and increase the delivery of services to consumers.

“There certainly has been escalating deal flow over the past several years as a lot of these facilities have been developed and delivered to the market,” says Alan L. Pontius, senior vice president in the commercial property group of brokerage firm Marcus & Millichap.

Cap rates in the single-tenant net lease medical sector compressed in the third quarter of 2015, with the median asking cap rate declining 22 basis points to 6.5 percent. Cap rates on medical net lease properties are now slightly lower than in the broader net least market, where they currently average 6.65 percent, according to a third quarter report from The Boulder Group, a Northbrook, Ill.-based investment real estate services firm specializing in single-tenant net lease market properties.

That cap rate compression can be attributed to strong investor demand, which is being fueled by a number of factors. Buyers are attracted to the positive outlook for the healthcare sector due to the anticipated needs of an aging baby boomer population. In addition, most medical-related net leases feature rental escalations and credit tenant lease guarantees.

Urgent care properties are seeing the highest level of buyer demand, which is why the sector is trading for the lowest cap rates at 6.3 percent, compared to 6.6 for dialysis clinics and 6.68 percent for general medical buildings.

“People really like the urgent care space,” says Randy Blankstein, president of The Boulder Group.

Investors think there is a giant need for urgent care clinics, and because the sector is still in the early stage of growth, most of the projects that have been developed have been in very strong, primary locations, he adds.

Throughout 2015 there has been continued cap rate compression in medical net lease assets, predominantly in properties with longer terms. According to Pontius, cap rates have compressed by a little over 100 basis points in the past year for medical net lease properties with terms of 10 to 15 years or longer, while cap rates on deals with lease terms of 5 to 10 years have remained relatively flat. In addition, properties with premium locations, credit tenants and longer terms are seeing cap rates dip below 5 percent, he adds.

TAGS: Net Lease News
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