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January 29, 2014
Lillibridge Climbs Mountains
When he's not ascending Mont Blanc outside Chamonix in France, Lillibridge Healthcare Services president and CEO Todd Lillibridge is scaling the ever-changing summits of healthcare real estate. (It's just as difficult but thankfully requires fewer carabiners.)
Lillibridge, a wholly owned subsidiary of Ventas (since 2010), completed over $1B in acquisitions in 2012 and 2013 (its 21M SF portfolio spans 29 states and over 200 markets). This year, Todd anticipates the most aggressive buyers will be non-traded REITs and developers with institutional partners. One trend: hospitals will continue evaluating deployment of capital into areas such as IT and physician integration. Todd also predicts continued consolidation of providers (there were about 100 M&A deals last year) as health systems try to leverage scale, drive efficiency, and geographically position themselves to capture specific patient populations.
Here's the firm's Good Samaritan II, on the campus of Advocate Good Samaritan Hospital in Downers Grove. The future of the standalone hospital is uncertain, especially in competitive markets where dominant players exist with an abundance of clinical resources and access to capital, he says. (Plus, now that Scrubs, ER, and House are off the air, we don't need the point of reference anymore.) For example, the Chicago area's largest multi-hospital systems have market share in the low to mid-teens. We haven't seen significant consolidation compared to other Midwest markets like Indianapolis and St. Louis, where three major health systems control over 60% of the market, he adds.
Despite healthcare's changing landscape and the implications of the Affordable Care Act, Lillibridge's acquisition strategy hasn't changed, Todd says. The target: market share leaders seeking to unlock the power of their balance sheets to care. Lillibridge continues to be interested in development, but the level of new construction has diminished since '08. Now providers are gradually moving back into the planning stage with smaller, community-based projects (America can return to a time when everyone knew their friendly, neighborhood foot surgeon) and on-campus disease-center projects (ex. oncology, cardiology, orthopedics).
Coalition's Co-Working Community
Why did New York-based MicroOffice co-founder David Rotbard set his sights on Chicago? Less density than the coasts but significant market depth and growth potential, says the co-working maven, who'll be speaking at Bisnow'sChicago Creative Office Summittomorrow. Entrepreneurs are setting up shop and staying put, with capital from small venture funds. The firm opened its Coalition co-working space in the penthouse suite of 18 S Michigan Ave last month (snapped last year while under construction), and occupancy continues to rise as it rolls out regular educational programming. The space has been tailored to green tech companies (like Energy Foundry).
A finished shot. (Bet you weren't expecting that carpet.) It's important to bring community clusters together, David says, “The success rate is higher and the motivation is greater.” At its newest project, Coalition River North (405 W Superior), MicroOffice has more bandwidth since they own the entire 50k SF building. David's thought about tapping into the financial technology sector, in addition to social impact startups--for-profit companies focused on making a difference. David himself is just back from a trip to Burma.
Cap Rate Record
A 15k SF Walgreens at 6121 N Broadway St just sold for $13M and a 4.87% cap rate, the lowest ever recorded for a Walgreens, according to Real Capital Analytics. The Boulder Group's Randy Blankstein, who repped seller Crossroads Development Partners with partner JimmyGoodman, attributes the record-setting deal to the property's urban infill location. (The buyer was a Massachusetts-based 1031 exchange.) Developed last year by Crossroads, the build-to-suit replaced an older store on the site. Since most Walgreens are suburban and new construction, buyers will pay a premium for an urban location with an existing client base and proven sales history, Randy (just back from surfing in Costa Rica, above) says.
But the pricing was still a surprise, and a testament to investor willingness to stretch in today's aggressive market conditions. But how long this low interest rate environment will last is anybody's guess. (It's like trying to predict the weather or the mood of a teenager.) “Placing long-term financing is the only strategy that works in a market like this,” Randy says. Buying a long-term leased asset like Walgreens with short-term debt gives you refi risk down the road and unexpected cash flow changes if rates move up. Owners should consider selling as risk-averse investors continue to gravitate to trophy assets in the urban core. There's a shortage of inventory, especially new construction, and the pipeline is still a trickle, he adds.