November 25, 2019
John B. Mugford

Q3 MOB Sales Were $2.2 Billion; 2019 Total Should Top $10 Billion Once Again

After a slow start to the year, medical office building (MOB) sales have picked up in the second and third quarters (Q2 and Q3), providing a very strong possibility that the final 2019 volume will top $10 billion for the fifth straight year.

According to Revista data, Q3 MOB sales totaled $2.2 billion, bringing the year-to-date total to $7.1 billion.

Revista’s data shows that the overall average cap rate for MOB sales was about 6.6 percent in Q3, with the average cap rate for MOB portfolio sales – referred to as a “portfolio premium” — coming in at 6.2 percent compared to a 6.8 percent average cap rate for single assets of 6.8 percent.

Revista data showed that the average price per square foot (PSF) for MOB sales in Q3 as $323.

Interestingly, Revista data shows that there is still a premium to be paid for on-campus MOBs, which sold for an average of $339 PSF; on the other hand, off-campus facilities sold for an average PSF of $321. 

While the average cap rate was 6.6 percent, properties considered to be in the top 25 percent in terms of quality, sold for an average cap rate of 5.8 percent. The he absolute highest quality properties sold for an average cap rate of 4.4 percent.

While the year-to-date MOB sales volume stood at $7.1 billion at the end of Q3, there is a good chance that Q4 will see a strong uptick in volume. This news come by way of a variety of industry professionals as well as 2019’s biggest buyer by far, Toledo, Ohio-based Welltower Inc. (NYSE: WELL).

Through the end of Q3, Welltower had made MOB investments topping $2 billion year-to-date. However, in recent weeks the publicly traded REIT announced that it had entered into five separate definitive agreements to acquire MOBs for a combined total of $1.67 billion. Those deals are expected to close by the end of 2019.

Welltower’s pending acquisitions includes a $787 million purchase of 29 “Class A” MOBs from Milwaukee-based Hammes Partners. In addition, the REIT announced that it is “under contract” to make four other, separate MOB transactions totaling $885 million.

Those purchases would bring Welltower’s total 2019 MOB acquisitions to more than $3.5 billion.

Welltower’s deals alone, should they indeed close by the end of the year, would bring the MOB sector’s overall volume for the year, when added to the $7 billion-plus recorded in the first three quarters, to nearly $9 billion and provide a virtual lock that 2019’s volume will exceed $10 billion once again.

Todd Perman, who is involved in MOB sales as the vice chairman of the Global Healthcare Services team with Newmark Knight Frank (NKF), says that one of the contributing factors to the strong MOB sales market in the last two quarters has been the strong appetites of the publicly traded healthcare-focused REITs, namely Welltower.

“The REITs are trading well above their net asset value (NAV),” Mr. Perman says. “At the end of the third quarter, Welltower was leading the pack trading at the highest percentage above their NAV at well above 30 percent. Not surprisingly, Welltower is also leading the pack in acquisitions. This competition is driving portfolio values up, compressing cap rates, and in turn driving the volume.”

Christopher R. Bodnar, vice chairman with the U.S. Healthcare Capital Markets team with CBRE Group Inc. (NYSE: CBRE), notes that having big portfolio offerings put on the market helped accelerate the MOB sales volume in Q3 and into Q4.

“Twenty-nineteen is shaping up to be a much more active year than initially anticipated,” Mr. Bodnar says. “The year started off slow with smaller, individual deals trading and has now progressed to more portfolio-level transactions, which should help overall sales volume align closer to 2018 activity.”

Sales were indeed quite strong in 2018, as Revista recorded a total MOB volume of $12.4 billion.

Mindy Berman, managing director and practice lead for healthcare in the Capital Markets Group of Jones Lang LaSalle Inc. (NYSE: JLL), says that MOB sales in Q3 alone are expected to total about $3 billion.

“A swelling tide of capital is chasing medical office today,” she tells HREI. “While closings through the first three quarters appear to be lower year over year, there are sizeable closings queued up for the fourth quarter, including $3 billion of large portfolios announced or in various stages of closing.”

Ms. Berman adds that a lack of supply to meet such strong demand from various capital sources in the first three quarters has “driven up pricing for quality properties, which is teasing interest from owners that are seeking to capitalize on excellent market conditions with continued low interest rates and strong availability of debt and equity capital.”