H2C MEDICAL OFFICE BUILDING QUARTERLY UPDATE
Q2 MOB Report
Consistent MOB Sales Activity - But Will it Slow Down?
Second quarter shows strong transaction volume and values through 140bps rate hike.
September 2022
Introduction
Medical office building (“MOB”) sales volume topped $3.0 billion in the second quarter of 2022 and average cap rates matched the all-time low average cap rate set in Q1. There was consistent transaction volume in Q2, which brought annualized volume to $17.4 billion, a 12-month gross sales volume record for MOB sales.
The number of properties exchanged in the second quarter totaled 255, which was a notable drop from the first quarter’s 315 properties, and about 2/3 of the number of properties sold on average in the second quarters of 2020 and 2021.
Average cap rates equated to the first quarter’s record-low, however, it is important to remember that many of the sales that closed in the second quarter were deals put under contract from January-March [pricing agreed upon]. Through the quarter, Federal interest rates were raised 180 basis points, suggesting that deals inked in Q2 that will close in the third quarter, likely reflect the higher costs of debt. A slight inversion in yield is expected to raise average cap rates slightly whereas the transactions in Q2 are more rear looking.
As we come off 2021’s record sales volume and record-high valuations for MOBs, there is still time for sellers to capitalize on the strong market, however, federal interest rate hikes that began in the first quarter present a hurdle for continued reduction in average cap rates.
Source: Based on an H2C analysis of industry data from RCAnalytics.
The combatant against cap rates materially rising is the increased interest in the MOB and healthcare real estate sector from new entrants as the space is viewed as more “recession proof” than asset classes such as retail and hotel. The sector also has some built-in moats compared to other asset classes and isn’t as exposed to a shift to work-from-home as the traditional office sector. The increased interest in MOB and healthcare real estate was seen in the second quarter by a Toronto-based healthcare real estate investment trust that made its largest acquisition ever in the U.S.
The largest transaction in the quarter took place when Northwest Healthcare Properties (TSX: NWH) acquired a portfolio of 27 MOBs and healthcare facilities for $600.0 million. The 27-property portfolio located across ten states contained over 1.2 million square feet and featured MOBs, micro-hospitals, surgery centers, inpatient rehabilitation facilities and behavioral health facilities with tenants that included Rush University Medical Center (A1/AA-/A+), Tenet Healthcare, Eating Recovery Center and Baylor, Scott & White (Aa3/AA-/NR), among others. The sellers were joint-venture partners of Harrison Street including Pisula Development, The Sanders Trust, MedProperties Group and Meridian Property Company.
As cap rates have hit all-time lows and interest rates have ticked up, H2C has seen an uptick in investors seeking healthcare real estate assets such as inpatient rehabilitation facilities (“IRF”), long-term acute care hospitals (“LTACH”), behavioral health facilities, and appetite for assets with shorter-than-typical lease terms remaining in an effort to quell the effect of more-expensive debt.
Source: Based on an H2C analysis of industry data from RCAnalytics.
Investment Sales and Trends
Health system real estate activity continues to pick up and was highlighted in the second quarter with Cedars-Sinai acquiring two MOBs adjacent to its 512-bed Torrance Memorial Medical Center totaling 141,025 square feet for $70.0 million ($496 per square foot). The purchase was from a Family Trust and it continues a trend of some health systems acquiring long-term, core assets that are adjacent and/or on-campus. Notably, H2C has led two similar transactions for health systems over the last 12 months.
On the other side of the spectrum, healthcare providers have taken advantage of the record pricing for medical office buildings, highlighted by Ares Management-backed Duly Medical Group’s (formerly known as DuPage Medical Group) spinout of the real estate it acquired through its acquisition of Quincy Medical Group. Following its acquisition, Duly executed a sale/leaseback for $67.2 million for three MOBs.
It is expected that health system real estate activity will pick up in the second half of 2022 as systems re-prioritize strategic initiatives following the COVID-19 pandemic.
The largest portfolio transaction behind Northwest Healthcare REIT’s 27-property acquisition was a two-property package in Los Angeles sold by Stockdale Capital Partners. The two properties, which totaled 101,513 square feet, were leased to UCLA Health (Aa2/AA/AA) and Cedars Sinai (Aa3/AA-/AA-) and transacted for $156.3 million, over $1,500 per square foot.
Regional Review
Buoyed by the two large packages of assets in the LA area that transacted, the Western U.S. had the largest dollar volume of sales in the second quarter with nearly $1.0 billion in transactions. Over the last year, the West saw $4.8 billion of transaction activity, which led all other regions.
75 properties transacted in the Southeast region, leading all other regions for the second quarter. Notably this is the eighth-straight quarter where the greatest number of MOBs have transacted in the Southeast, which is supported by the size of that region in the RCA data but also the number of investors who actively target the region for investment.
Source: Based on an H2C analysis of industry data from RCAnalytics.
Northeast Region
In June, Remedy Medical Properties acquired Amherst Medical Center, a 163,200 square foot MOB in Amherst, NY, for $22.5 million. The building, which is under development, is expected to open in Spring of 2023. Once completed, the Property will be home to such tenants as UBMD Orthopedics & Sports Medicine, General Physicians P.C. and Kaleida Health, in a joint venture with University at Buffalo, and will have an ambulatory surgery center in the building.
Also in June, LaSalle Investment Management acquired the Haverhill Medical Office Building, a multi-tenant MOB in Haverhill, MA, for $22.5 million, or $746 per square foot. The building, totaling approximately 30,130 square feet, was developed in 2017 and is anchored by Anna Jaques Hospital. Additional tenants include Beth Israel Deaconess Health Care and Pentucket Medical.
Mid-Atlantic Region
In June, Welltower Inc. (NYSE: WELL), in partnership with Thomas Park Investments, acquired a medical office building located at 8300 Health Park in Raleigh, NC. The 185,000 square-foot MOB was sold for $35 million by Williams Property Group equating to $189 per square foot at 6.3% capitalization rate. The 16.21-acre property is leased to multiple tenants consisting of Duke Health (Aa2/AA/AA), UNC Health (Aa3/NR/AA), Healthtrax Fitness & Wellness, Raleigh Endoscopy Center, and others.
In May, Global Medical REIT (NYSE: GMRE) purchased Prosperity Plaza, a 96,070-square-foot medical office building from The Tomares Companies. The 7-story building is located at 3020 Hamaker Court and is less than a mile from Northern Virginia’s largest health care facility, Inova Fairfax Hospital. The location is outside the Mosaic District and the continued demand for medical office buildings created intense competition from investors. The building is 84% leased to medical and office tenants. The property sold for a price of $21 million or $219 per square foot.
West Region
In July, Montecito Medical acquired the Rio Bravo Cancer and Imaging Center building in Bakersfield, CA. The MOB was constructed in 2015 and consists of two buildings totaling 66,000 square feet. The seller was the developer of the building, G. L. Bruno Associates. The building is leased to multiple tenants, including Kern Radiology (30%), Bakersfield Specialist Surgical Center (25%), Rio Brain Oncology (14%), and other smaller urgent care centers. The facility provides a wide range of services ranging from radiology, multiple varieties of imaging, orthopedics, neurosurgery, gastroenterology, and urology.
In June, Evergreen Medical Properties acquired a medical office building located at 1395 Mount Hood Ave in Woodburn, OR. The single-story, 82,150-square-foot property was sold for $39.5 million, equating to $481 per square foot, by Engle Robert & Carolyn Trust. The facility is conveniently located across the street from Legacy Urgent Care and within three miles of Salem Health Medical Clinic.
Southwest Region
In May, JLL Income Property Trust acquired Flagstaff Medical Center, a newly constructed property located in northern Arizona. The single-story, 26,400-square-foot property was sold for $17.2 million, which equated to $652 per square foot. The new building provides MRI, CT, X-ray and ultrasound imaging within its state-of-the-art surgery center. The building is fully leased to Northern Arizona Healthcare (Baa2/NR/AA-) and aligns with the acquirer’s strategy to invest in outpatient, stand-alone centers rather than in a traditional hospital setting.
In April, Hammes Partners acquired a multi-tenant medical office building from MARs Hospitality. The two-story 27,858-square-foot property is located at 19284 Cottonwood Dr and houses the Children’s Hospital Association, Mountaintop Family Health and IQRE. Built in 2006, the building sits on a 1.96-acre parcel and is located less than a mile from Parker Adventist Hospital. The purchase price of approximately $10.6 million equated to $381 per square foot.
Midwest Region
In April, Physician Realty Trust (NYSE: DOC) acquired the New Albany Medical Building II from Minneapolis-based Davis HRE. Located on Trinity Health’s Mount Carmel Surgical Hospital Campus, the 59,233-square foot building houses several specialty medical tenants. Davis initially invested in renovations to the property and linked the building via skywalk to the surgical hospital. The MOB is 95% leased to a diverse mix of healthcare practices and the transaction is seen as a win-win for both involved parties. The purchase price of approximately $27.7 million equated to $468 per square foot.
In June, Syndicated Equities acquired a single tenant medical office and training facility in Fenton, Missouri. The 55,000-square-foot, two-story building is 100% leased to SSM Healthcare (A1/AA-/A+) and adjacent to its St. Clare Hospital (100 beds). SSM Health utilizes the first floor as medical office space and the second floor for training and a simulation center. The property sold for a price of $14.4 million or $262 per square foot.
In July, Minneapolis-based MedCraft Investment Partners, acquired a two-building package in South Bend, Indiana. Both buildings are fully occupied by South Bend orthopedics, a leading orthopedic group in Indiana. South Bend Orthopedics MOB occupies a 3.7-acre site at 53880 Carmichael Drive and is adjacent to a 4.3-acre parcel occupied by Allied Physician Surgery Center at 53990 Carmichael Drive. Both the MOB and ASC buildings were built in 2000 and measure 36,269-square-foot and 41,124-square-foot respectively. The purchase price of approximately $33 million equated to $426 per square foot.
Southeast Region
In June, Anchor Health Properties, in partnership with Harrison Street, acquired Crossroads III, a 95,777-square-foot medical office building in Plantation, FL. The Class-A medical facility was sold for $45.5 million equating to $475 per square foot. A majority of the property is long-term leased to the University of Miami Hospital (A2/NR/NR). UM plans to expand the campus by developing a 15,000 square-foot radiotherapy center. The facility is conveniently located within seven miles of HCA Florida University Hospital, Plantation General Hospital and Mercy Hospital.
Dallas-based Big Sky Medical acquired the Vestavia Hills Medical Plaza in Birmingham, AL. The 40,000-square foot MOB was completed in 2019 and includes an ambulatory surgery center. The tenants at the property include Grandview Medical Group Orthopedics and the Swaid Clinic, a four-physician practice specializing in neurology and spine surgery with a remaining space vacant. The $27.8 million purchase price equated to $695 per square foot.
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