The US medical office sector is seeing more interest from domestic and international lenders, responding to increased healthcare spending stemming from the impact of the covid-19 pandemic and an aging population.
Ted Flagg, a senior managing director at JLL, said international capital, particularly lenders from the Middle East, and domestic private equity firms are increasing their footprints in the debt markets for medical office buildings. These lenders like the resiliency demonstrated so far by the sector, particularly in outpatient facilities.
JLL recently arranged the sale of a stake in a medical office portfolio owned by a partnership between Nashville-based Montecito Medical Real Estate, bringing in AEW Capital Management to buy out Montecito’s partner on the properties. One common theme throughout the sector is a depth of experience.
“Some of the best names [in medical office right now] are groups that have been studying medical office for a number of years,” Flagg told Real Estate Capital USA. “[They see] the benefits of the resilience of the cash flows particularly through covid.”
This resilience is likely to lure larger investors and lenders to the space and drive cap rate compression. JLL found strong demand from lenders who wanted to finance the portfolio, noted Daniel Turley, a senior managing director. The firm ended up arranging a $176 million acquisition loan BMO Harris Bank to finance the deal after receiving fully vetted term sheet within two weeks of marketing the portfolio.
“Debt pricing is more competitive than it was pre-pandemic,” Turley said. “There was a brief pause in lending during April 2020, but as lenders understood that healthcare assets performed better than some other assets, we witnessed a number of new lenders entering the space. Competition and lack of product will likely keep pressure on the pricing in the near term.”
Ryan Stewart, head of healthcare real estate finance at BMO Harris Bank in Chicago, said that while the traditional lender for medical office portfolios and single-tenant properties had tended to be private equity firms, borrowers in 2020 and 2021 are increasingly long-time players and institutional investor JVs.
BMO Harris Bank, he said, has financed approximately eight medical offices deals including new construction for outpatient facilities in 2021.
“The asset class performed about as well as any other during covid,” Stewart said. “I think that institutional investors certainly took note of that. It’s recession-resilient.”
Medical office capital flows
Jim Costello, a senior vice-president at Real Capital Analytics, said the depth and distribution of capital for medical offices was mostly back to pre-pandemic levels as of August.
“[Outpatient medical office] is easy to quantify and lends itself well to some sort of structured investment vehicle,” Costello said. “There is standardization in quick, outpatient facilities that makes [financing] more predictable.”
According to Real Capital Analytics the largest originators of loans for medical office in the US in 2021, as of August, were local banks (45 percent), national banks (17 percent) and private investment firms (9 percent). At least 83 medical office properties across the country were acquired or recapitalized by a handful of investment firms in September as part of a broader trend of institutionalization in the sector.
CBRE reported net acquisitions of medical office buildings by institutional investors set a record in 2020. And report on emerging trends from PWC from 2021 said that aging baby boomers and grown in health care spending will support lending towards medical office as the health care industry itself is expected to decentralize.
Demand for medical office off campus, PWC said, will increase as health professionals migrate from hospital campuses to outpatient facilities. Indeed, the Center for Medicare and Medicaid Services in 2019 projected that national health spending will increase at an annual average rate of 5.4 percent and reach $6.2 trillion by 2028 while the price growth for medical goods and services is expected to accelerate over the same nine years.
CMS also projected health expenditure growth will outpace gross domestic product growth from 2019 to 2028 and cause the health share of the economy to increase from 17.7 percent in 2018 to 19.7 percent in 2028.
Nuveen recently secured financing to acquire and recapitalize a 27-property portfolio of medical office properties, obtaining a $234 million loan from Allianz Real Estate.
Andrew Pyke, senior director of real estate alternatives at Nuveen, said the equity markets for medical office are more competitive now than when the firm began investing in the space in 2019.
Nuveen recently acquired a portfolio of high-acuity medicine facilities in core locations spanning 13 states. Nuveen is focused on the growth of outpatient services, with the latest portfolio acquisition consists primarily of out-patient facilities, Pyke said.
Part of Nuveen’s healthcare strategy is to assess existing retail and its traditional office holdings for medical office conversion opportunities.
“We evaluate our traditional office and retail exposure for opportunities to add health care tenancy,” Pyke said. “Single-storage office, retail, and flex represent a good opportunity to convert to medical. Converting existing real estate to medical providing health care to communities, provides an efficient means to deliver high quality healthcare at lower cost directly to communities.”
Allianz also wants to increase its footprint in medical office.
“Given what happened with the pandemic, we feel that this a long-term sustainable approach to the business,” Mike Cale, co-head of debt at Allianz Real Estate told Real Estate Capital. “We look to invest through the cycle, and we believe that the medical offices sector is a long-term opportunity.”