As Competition Heats Up, Investors Take On More Risk
Over the past year or so there have been many headlines speaking to how hot the medical real estate sector is. You see them pop up in your email or news feed: “Sales volume is at all time highs”….. “New investors are entering the sector right and left”….”Medical Real Estate Hitting Post Recession Peak”. At times like this, many investors are getting priced out of the ‘cream’ offerings that trade and the heavy weight health system construction projects. So it would stand to reason that those interested parties would look elsewhere….and they are. To explore, let’s look at some trends surfacing in the Revista data.
Revista not only tracks medical office construction projects in terms of size, cost, open and start date, but also whether that project will be occupied by a hospital or hospital system. Out of the 26.7 million square feet currently in progress as of October, 6.8 million is not affiliated with a hospital system. That means it’s either sponsored by a physician/medical group, it’s pre-leased by a physician/medical group, or it’s speculative. 25% may not seem like much. The lion’s share of outpatient construction activity is still for hospitals. But although modest, it’s certainly up from the 2016 pipeline representation of 20% and in looking at project starts over the last few years there is a clear uptick. This makes sense though and is another piece of the story showing where we are in the cycle. This is not to say we’re overbuilding – not at all – in fact we’ve seen a modest slowing in terms of total new construction. The focus, however, is certainly shifting.
As competition heats up and yields continue to be under pressure, investors find they have to take on more risk to meet the returns they need. This risk can take on many forms from tenant quality and size to tenant makeup to geographic location. And the case is not only made in construction, but medical office sales as well. We’ve mentioned on a number of occasions that a significant amount of transaction activity is condensed in major metros. Transactions in large, possibly high barrier to entry markets often are those ‘cream’ deals that are comprised of large class A buildings leased by highly rated health systems. Below is a chart showing total medical office square feet traded split by whether those properties fall in one of the top ten largest metro areas. The top ten metros often represent more than 40% of total sales. Outside of those top metros though, you see volume increasing every year. Secondary markets and buildings anchored by physician practices or local hospitals are becoming more attractive. For some, hunting down opportunities off the beaten path has been the investment strategy all along. For others, this is a shift with the times. Looking for YOUR next opportunity? See how a Revista subscription can help get you there.