Healthcare real estate is no longer a niche or on-the-fringe asset class. That was the consensus of the expert panelists who spoke during Connect Healthcare 2017’s panel on acquisitions and investing. You can read a re-cap of all the panels here.

The new mindset about healthcare real estate is the result of more investors and lenders being interested in the space, according to American Healthcare Investors’ Stefan Oh. His firm recently completed an interesting deal: a nine-property senior housing portfolio in Central Florida. He and his team were in the middle of due diligence on the deal when Hurricane Irma blew through the area.

Now that healthcare real estate is mainstream, that means more competition for quality assets. All of the panelists fondly recalled the days when MOBs traded at 10% cap rates, and they lamented current cap rates of 6% and lower.

NexCore Group’s John Marshall noted there’s very little spread between on-campus and off-campus properties, because the campus is less important than it used to be. And while the panelists agreed that the cap rates have reached a level of frothiness, it’s not so frothy that they aren’t investing.

Meridian Property Company’s John Pollock, who spoke with Connect Media prior to the event for an insightful Q&A, agreed that competition is fierce from new players, and supply is constrained. He noted that most of the sellers are long-term holders, private owners and  physician owners.

While Duke Realty’s $2.8 billion portfolio sale raised eyebrows and set a new benchmark for MOB valuations, Marshall contended that there are only a few portfolios of healthcare property on the market. He doesn’t expect many healthcare systems to divest their portfolios in the near future. In fact, he’s noticed an uptick in these systems buying back their real estate.

Global Medical REIT’s Alfonzo Leon, who is under an investment mandate to invest only in properties at a 7% cap rate or higher, said the competitive demand for medical office properties is forcing him to do “mental yoga” to find a way to make complex deals work.

Leon noted that Global Medical REIT is focused on secondary and tertiary markets, and detailed a recent deal that highlighted the complexity of investing in healthcare real estate. In this particular situation, a particular physician was the “king of the campus,” providing as much as 90% of the hospital’s revenue. As a potential buyer of the MOB in which the physician officed, Leon and his team were ordered to “do no harm” to the relationship.

Someone not familiar with the importance of tenants might not understand how to navigate that situation, Leon said. Specifically, they might not understand that upping the rent could anger the physician and create problems for the hospital.

Cox, Castle & Nicholson’s David Lari admitted that he’s a bit concerned about the new investors in the sector who may not understand the complexity of healthcare ownership. These investors are responsible in large part for the cap rate compression in the industry. However, Lari pointed out that healthcare real estate cap rates still compare favorably to other sectors, particularly industrial and multifamily.

The panelists also touched on the retailization of healthcare. Marshall noted that there are a number of examples of successful projects, and he thinks more healthcare providers would go into retail settings if given the opportunity. “But landlords and other retail tenants don’t want ‘sick people’ coming into their centers,” he explained.

For questions, comments or concerns, please contact Jennifer Duell Popovec

Subscribe to Connect Healthcare