From the rents in Atlanta's “diamond” medical office markets to the flood of investor interest in healthcare properties, here are five things we learned this morning at our Atlanta 2016 Healthcare Leadership Forum.
1. It's Good To Be A Seller
While cap rates have been averaging nearly 7%, that can vary wildly from nearly 9% to sub-5% in some markets, says Physicians Realty Trust CEO John Thomas. And that's a sea change in attitude by investors who a decade ago frowned on the MOB market largely because they didn't understand how it worked. “Now the world sees medical office as a defensive safety asset,” Thomas says, with both institutional and foreign capital jumping in.
Thomas was part of an all-star healthcare real estate panel that involved Arnall Golden Gregory's Steven Kaye (as moderator), Eastwood Real Estate Services CEO Christine Gorham, Caddis CEO Jason Signor, Ackerman Medical's John Willig and Meadows & Ohly chairman Tom Rhodes. Of course, that pricing is a double-edged sword. “I think pricing last year was outrageous,” Jason says. “We'd love to be able to buy at a better price because last year was tough.”
2. Senior Housing: More Risk, Better Yield
Jason says developing medical office properties for health systems has seen the spread between development costs and sales prices shrink, in some cases to 50 basis points, due to elevated land and construction costs. Caddis, in turn, has begun developing more senior housing projects in a chase for better yield, but with more risk given the market's sketchy performance in the past. That may be coming to an end, he says. “We think senior housing, given the demographic shift of the Baby Boomers...we're really building and getting ready for them,” Jason says. “That tsunami hasn't hit yet.”
3. Hospitals Hate Being Landlords
One of the big effects of the Affordable Healthcare Act has been a rash of consolidation as hospital and big healthcare systems buy up smaller physician practices. That has led to questions on what to do with the real estate if those physicians own their buildings because hospitals “loathe” owning real estate, Thomas says. Meadows & Ohly's Tom (on left) says his group has often come in on the back side to buy out the real estate in those situations, while maintaining the leases.
4. There's Upward Rent Pressure
Rents have been pressed upwards in recent years, especially as a viable pool of MOB product diminishes. Christine says rents in secondary markets can reach the low $20 per SF and even get to $30 per SF in primary markets. But “diamond” submarkets like Midtown, Buckhead and even around the Avalon mixed-use project in Alpharetta? She says rents at MOBs there are at all-time highs, from $30 per SF to touching the $50 per SF cap in some cases. And that's because of demographics: Patients there have the money that healthcare systems deeply desire.
5. Many Haven't Yet Faced New Rent Reality
Ackerman's Willig says the pressure to push up rents is being countered by tenants who are balking at rising prices. That has put a damper on new MOB development as tenants wrestle with escalated land and construction pricing being reflected in rent quotes. A lot of tenants, Willig says, don't remember any cycle before the Great Recession. The world is different now, he says, and things like two months free rent on a new lease just no longer exist.
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