June 30, 2021
John B. Mugford

A record-setting MOB cap rate of 3% in the Bay Area

Anchor, Morgan Stanley pay $64.4 million for hospital-adjacent asset in Burlingame, Calif. 

A deal that recently took place in Burlingame, Calif., in the suburbs south of San Francisco, may have set an all-time cap rate record for an investment-grade MOB. 

In the transaction, a joint venture partnership of Media, Pa.-based Anchor Health Properties and Morgan Stanley Real Estate Investing (MSREI), part of New York-based Morgan Stanley (NYSE: MS), acquired a recently renovated, 106,018 square foot, three-story MOB at 1720 El Camino Real, which is across the street from the 242-bed Mills-Peninsula Medical Center. The hospital is part of Sacramento, Calif.-based Sutter Health. 

According to Revista data, the price was $64.4 million, or $607 per square foot (PSF), at a cap rate of 3 percent. 

The seller was a partnership of New York-based Angelo Gordon & Co. and Dallas-based Lincoln Property Co., which had acquired the facility in late 2018 and embarked on a “multimillion dollar” renovation. 

While James Schmid, Anchor’s chief investment officer and managing partner, did not provide the price paid for the asset, which includes a parking garage, he said that when a planned capital expenditure (CapEx) program is added to the purchase price, the total investment will be about $70 million. 

He also notes that the Anchor/Morgan Stanley partnership has had plenty of success, acquiring more than $500 million worth of medical facilities since making its first purchase four years ago. 

According to a team with Newmark, part of New York-based Newmark Group Inc. (NYSE: NWMK), that represented the seller, the MOB offering garnered strong interest from a variety of investors, with 18 submitting bids. 

“By making this acquisition, (the new owner) has positioned themselves as the most-dominant — perhaps the only — game in town when it comes to providing institutional-quality space in the only medical facility with significant size, topping 100,000 square feet, in a submarket of 20,000 to 30,000 square foot MOBs,” said Ben Appel, part of the Newmark team. “This facility, really the trophy asset in the submarket, sits within 250 yards of the front door of Sutter Health’s hospital, and is in an immediate area that is on the rise and where owners of other commercial and residential buildings nearby are being renovated.” 

Mr. Appel was joined on Newmark’s team by Steven Golubchik, the company’s head of Northern California Capital Markets, and Senior Managing Director Seth McKinnon. 

The MOB at 1720 El Camino Real is about 88 percent occupied, with Sutter Health, which has an A1 rating from Moody’s, and Palo Alto, Calif.-based Stanford Children’s Health (Aa3 rating from Moody’s), as the anchor tenants. 

“All of this is why this MOB is the premier medical facility in the submarket” of Burlingame, Mr. Appel said, which is about 15 miles south of San Francisco and within a couple of miles of San Francisco International Airport. 

Both Mr. Appel and officers with Anchor say they believe the MOB will see an increase in occupancy in the future, perhaps resulting from a need for more space from the anchor tenants. According to Anchor, the “adjacent hospital’s continued growth will lead to more demand for Class A specialty care space within close proximity.” 

For Anchor, which will provide leasing services as well as asset and property management for the facility, the acquisition is the first of several investments it has planned for the Greater Bay Area. 

“We are thrilled to finally launch our platform efforts in the San Francisco market and expand our broader presence in Northern California with this best-in-class and highly sought-after acquisition,” Mr. Schmid said in a news release. 

“This asset represents our continued investment momentum and focus in a dynamic healthcare market where we are seeking to add scale. The El Camino Real facility meets important investment criteria including proximity to a large hospital campus and intense demand from local healthcare providers where we have the opportunity to form a long-term relationship with respected names in U.S. healthcare, such as Sutter Health and Stanford Children’s Health.” 

John B. Mugford
Healthcare Real EstateInsights