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Medical Office Catches Fever

When Santa Ana, Calif.-based Grubb & Ellis Healthcare REIT purchased a portfolio of five medical office buildings in Florida and Kansas for nearly $37 million on February 1, it signaled the latest in a long run of continued investor interest in the medical office property segment.

Several other recent deals have shaped up in recent days. Last week, San Antonio-based Atlee Development Inc. sold a six-building portfolio of medical office properties located in six states to Santa Barbara, Calif.-based Montecito Medical Investment Co., which specializes in the acquisition and development of hospitals, medical offices and surgical centers.

At the end of January, Charlotte-based tenant-in-common investor American Investment Exchange paid $16 million, or $145 per sq. ft., for a building in Columbus, Ohio. That represented a 74% premium over the $9.2 million that seller Robert Atwell Jr. paid just six years ago.

Also last month, Denver-based Nexcore Group, which acquired and developed more than $200 million of healthcare properties in 2007, opened a Chicago office and snagged two local healthcare real estate veterans, William Maggard and Mervyn Alphonso.

Several factors continue to drive the medical office trend. The country’s aging population requires more medical care, and hospitals have been on a building binge for the past five years, spawning development of neighboring medical offices. Physicians and healthcare groups are also moving smaller stand-alone facilities closer to patients in suburban markets.

According to a recent study by Marcus & Millichap, the long-term outlook for the medical office market looks bright. “Once viewed as a higher-risk specialty asset, medical office properties have clearly become main stream for private and institutional investors,” notes the report. “Long-term leases and low tenant turnover, combined with a stable market outlook and advancing medical technology, point to a positive future.”

While the final numbers are still being tabulated, developers were slated to complete 14.5 million sq. ft. of new medical office space in 2007, a 9.5% increase over 2006. More than a quarter of that space was slated for the Mountain and Southwest markets.

Despite the building boom, transaction volume has recently taken a dip from its heady pace in mid-2007. According to new research from New York-based Real Capital Analytics, fourth-quarter 2007 medical office sales dropped to $920 million from $1.6 billion in the second quarter. Still, for all of 2007, $5 billion in sales were recorded on 378 properties, up 13% from 2006. More than 50% of the sales were in the West and Southwest, with Dallas ($350 million), San Diego ($330 million) and Seattle ($320 million) accounting for the top three markets.

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