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New Venture Aims For Value-Add Medical Offices, If It Can Find Them

Two local brokers have joined forces with a cohort of investors in the hunt for value-add medical office space in the Southeast.

New Venture Aims For Value-Add Medical Offices, If It Can Find Them
Duluth's 3790 Pleasant Hill Road medical office building, just across from the Gwinnett Medical Center

Highgate Partners partner Beau Terrell and Andrew Murphy, senior vice president of healthcare investments with Ackerman & Co., have teamed up and already purchased some 120K SF of medical office buildings throughout Metro Atlanta, including 3790 Pleasant Hill Road, a 34K SF MOB in Duluth directly across from Gwinnett Medical Center.

The new investment firm, AMBT Holdings, is made up of private equity from various investors throughout the Southeast, Murphy said. It is primarily in the hunt for value-add medical office, but with a catch: It is only considering properties within the shadow of a major medical facility.

In its portfolio so far, the group has purchased older MOB properties within walking distance to both WellStar Cobb Hospital in Austell and DeKalb Medical Center. The venture's plan is to quickly lease up the properties, most of which are 50% to 80% filled, then sell them quickly after some improvements, Murphy said.

“We've been able to find off-market, below the radar product,” he said. Murphy and Terrell — who worked together for a number of years at Carter — are also in the market for traditional, value-add office investments.

New Venture Aims For Value-Add Medical Offices, If It Can Find Them
Private buyers dominate the U.S. medical office investment market, according to a recent Marcus & Millichap report.

But finding value-add medical office may be easier said than done.

“A lot of that has to do with the fact that many of the tradable, privately owned medical office buildings have traded hands in the last few years,” said Korey Prefontaine, an associate with Marcus & Millichap in Atlanta who specializes in MOB investment sales.

The fallout from the Affordable Care Act has created a rampant consolidation environment where hospitals have been buying up independent medical practices, often moving them onto hospital campuses. Hospital systems also have been putting satellite practices in mixed-use projects or expanding hospitals in amenity-rich areas, such as Piedmont Hospital's Buckhead expansion, now underway.

Marcus & Millichap's report noted that most of the buyers over the past few years have been private investors, well outpacing REITs and institutional funds.

Piedmont Atlanta Hospital Buckhead

That has made off-campus, older MOBs fall relatively out of favor with overall investors, Prefontaine said, unless the building has a credit tenant, such as a major healthcare system.

“But there's that fine line though,” he said. "If you have a multi-physician practice that 10 years ago did a lease in the back of an office park ... those are falling by the wayside. It's about being in the right suburban location."

A recent Marcus & Millichap report echoed those sentiments. Older off-campus MOBs can get cap rates of 8% or more. Yet there has been a dichotomy as well: Rent growth for older MOBs has actually been stronger in recent years, with a 3.5% gain in the past six years for those buildings built before 2000. And healthcare use will not be dissipating anytime soon.

Beginning in 2011, baby boomers started turning 65. And according to Pew Research Center, 10,000 baby boomers a day will turn 65 for the next 14 years. By 2030, 18% of the country will be 65 and older, and per capita healthcare expenditures are on the rise.

As of 2016, an average American's healthcare costs exceeded $10K, and they are expected to grow 5.8% a year through 2025, according to a recent Colliers International report, and healthcare reform legislation in Congress could raise them even more.

That, Murphy said, gives his investors an edge in the MOB market.

“If we were buying buildings two miles off campus, that would be one thing,” he said. But Murphy said the firm underwrites its acquisitions with $2/SF to $3/SF rents below the market average. And even after pumping money into property upgrades, “we can always be, at any economic standpoint, a value play for tenants.”