Investors keen on medical office real estate

The medical office building (MOB) investment market in the first quarter of 2014 lacked the volume we saw in Q1 2013. However, a number of high-quality assets traded at very aggressive cap rates.

Having just returned from the BOMA Medical Office Building & Healthcare Facilities Conference in Nashville, I can assure you that investor interest in this asset class remains very high. My team has been attending this conference for several years. In 2008 & 2009 everyone was talking about capital, who has it and where to get it. Now, investors have plenty of access to capital, making it a very good time to consider selling medical office buildings.

While there is talk about hospital monetization, we have been seeing the larger healthcare systems acquire MOB’s, quite the opposite trend of monetization. It appears the lower rated for-profit hospital systems are the most likely to monetize due to their cost of capital and high taxes. A not-for-profit healthcare system with a high credit rating is much less motivated to monetize. For example, if a not-for-profit’s cost of capital was 4.5 percent, the CFO would likely seek a 250 basis point spread in a new investment, or 7 percent, a figure already being obtained in the medical office buildings they occupy and own.

Last quarter, we forecast cap rates would remain in the low 7 percent range, which is exactly what we have been seeing. We anticipate staying in this range for quality assets for at least another quarter. Cap rates will vary depending on many factors, including proximity to campus, asset quality, creditworthiness of tenants, structure of the leases, escalations, lease term and demographics.

The 2014 dollar volume forecast is similar to last year, where we finished at $6.23 billion for assets greater than $5mm. While Q1 2014 is lagging well behind what we saw last year, investors’ capital raises have not slowed down. Based on this we forecast dollar volume for 2014 to be in the ballpark of $6.5 billion.