By Andy Litvak, Hartmans Simons partner
Note: This post originally appeared on the Atlanta Business Chronicle's Real Talk blog.
The last several years have proven to be an extremely volatile period for investors and owners of commercial real estate properties.
While real estate investment has never been for the faint of heart, thoroughly vetted and calculated investment strategies have typically proven to produce strong yields (irrespective of asset class). Given the nature of these tumultuous times, I have observed many of my clients gravitate toward far ends of the investment spectrum.
By way of example, many have employed a "carpe diem" attitude and have attempted to seize the day by capturing perceived home run opportunities and returns in the distressed property arena. These distressed asset strategies have been the topic of much discussion of late, and there are certainly no shortage of hungry investors seeking to acquire REO or so-called "value" add properties, purchase notes at significant discounts or otherwise eager to recapitalize underfunded partnerships by injecting fresh equity.
On the other side of the spectrum, however, there are legions of investors seeking stable properties which produce consistent, low risk dividends. Many of these buyers are institutional players (REITS, life companies and pension funds), and their individual investors and annuitants are craving "coupon-clipper" deals producing reliable and consistent income streams. Along these lines, net-leased properties with corporate or other high credit tenants and grocery anchored retail centers have proven to be very attractive.
The strong demand for these stable properties has resulted in bidding wars and cap rate compression. Although, perhaps the new leading contenders in this category are "MOB's" – medical office buildings.
Long before the current real estate downturn, MOB's were viewed as recession resistant properties. The strength and credit of the physician practice group tenants, historically low turnover and consistent patient base requiring medical services lends to an inherently strong degree of stability. Now, fast forward and infuse equal doses of the ever-evolving world of health care legislation reform, new trends in practice group and hospital consolidation and other anticipated changes in health care delivery models — and you have all the ingredients to attract major interest in MOB investment by sophisticated investors.
Investors are downright giddy and bullish about the investment prospects of this CRE sub-sector. They see many macro-level factors influencing the medical industry, including the virtual certainty of more people coming into the system and the need to accommodate that increase – think, more square footage. They also see an aging population and intense economic pressure on certain private doctors causing them to strongly consider joining forces and becoming employed by hospital systems.
Many professionals in the medical real estate community are predicting increased growth by the larger health care systems. As the big systems get bigger, the "on-campus" MOB's adjacent to the hospitals are destined to become more integrated within the overall operation of the hospitals.
For that reason, many hospitals are continuing to acquire physician practice groups who can see patients in close proximity to the hospital. In many cases, these practices also generate bed nights for the hospital. From a real estate investment standpoint, direct hospital "sponsorship" in a privately owned MOB is an extremely attractive feature.
It is also noteworthy that on-campus is not the only place to be these days. "Destination" MOB's are continuing to sprout-up in suburban areas, which effectively allow for ambulatory and other outpatient services to be conveniently delivered close to patients' homes. Developers and doctors alike are very in tune to creating a favorable "patient experience". Convenience is a key component, and it's certainly a benefit to the soccer moms if they do not have to drive downtown in their minivans to the campus based health system.
The bottom line is that there are currently many factors in play in the medical real estate development and investment world.
Hospitals have always been capital intensive operations and MOB development has likewise always been a strategic proposition. Growth has been, and will continue to be, carefully tailored to the key drivers and sources of health care services: physicians and the ultimate recipients (patients). Much uncertainty remains in this evolving healthcare landscape.
MOB owners and investors must maintain flexibility, as doctors continue to seek reduced occupancy costs and large up front economic leasing packages. Nonetheless, these are exciting times for all those involved in medical oriented commercial real estate. As has always been the case, it's best to follow your doctor's orders: these days, you would be well advised to listen very carefully to your doctor as to what lies ahead.