print header

# 1 Commercial Real Estate Information Company

  • Find Properties 
  • Market Properties 
  • Analyze Properties 
Commercial Real Estate News

Institutional Capital, New Development Driving MOB Investment

Large MOB Portfolio Sales Highlight Rising Interest in Alternative Asset Class
March 19, 2018
The St. Vincent Carmel Women's Center in Indiana is part of a $2.7 billion portfolio acquired by Heitman from Duke Realty last year.

Heitman's recent purchase of 17 medical office buildings totaling 1.4 million square feet in seven states, one of the largest MOB portfolio sales of recent years, is just the latest example of rising investor interest in an alternative asset class that some analysts believe ranks second only to apartments in its enduring allure for large institutional investors.

The sale to Heitman last month of the Partners Health Trust (PHT) portfolio by Bentall Kennedy, a Sun Life Investment management company managing $37 billion of assets, is among a string of portfolio deals that boosted MOB and outpatient care facility sales to over $10.7 billion in 2017, according to CoStar data. REITs, private-equity, pension funds and even foreign buyers are picking off deals from an ample pipeline of opportunities as owners are teased into selling by the prospect of superior prices, often at sub-5% capitalization rates.

Big portfolio sales like the PHT portfolio and Duke Realty's $2.7 billion disposition of its healthcare business to Healthcare Trust of America, Inc. (NYSE: HTA) suggest that more large multi-property opportunities are in the offing.

"Health care real estate is emerging from the shadows of alternative sectors," said Jonathan Geanakos, president with JLL Capital Markets, which arranged the sale of the PHT portfolio, adding that interest in medical office is at an all-time high given the capital available from core investors and continued interest from foreign investors looking for stable income from U.S. investment property at more-attractive yields than available from core multifamily and office options.

Large-scale MOB portfolio investment opportunities will continue as outpatient care expands in the U.S., JLL officials contend. Health-care providers continue to try to lower costs by shifting more services into lower-cost outpatient settings. For the first time in history, outpatient care constitutes a larger share of health-care revenue than in-hospital care, according to JLL, at a time when experts project annual health care spending to grow by more than 5% per year, with the majority expected to occur in ambulatory care facilities.

Investors are circling the space and regularly calling for off-market opportunities to enter the market or expand their portfolios, said Marina Hammersmith, senior vice president of healthcare brokerage services for the Phoenix office of Ensemble Real Estate Solutions.

"Sellers typically achieve the highest prices with these large portfolio transactions," Hammersmith said. "Not only does this hold true for the well-occupied properties, but sellers can fold in under-performing assets within these larger transactions and garner higher prices than they would if they sold those assets individually."

"The primary driver toward this asset class is the perception of insulation against broader market conditions - we need health delivery outlets and that need will only increase in the foreseeable future," Hammersmith continued, predicting a robust year for MOB sales. "For buyers, the mitigation of risk with a well-diversified portfolio is attractive."

Those trends may present a perfect prescription for healthy MOB fundamentals. The national medical-office vacancy rate fell to a record low of 7.3% in 2017, the sixth straight year of decline, and national gross asking rents have increased 8.5% since 2013 to about $20.50 per square foot, according to CoStar information. The appetite for portfolio acquisitions may be larger than the supply of properties available for sale, Hammersmith said.

"I believe the pool of opportunity is beginning to show signs of decline as many of the investors who hold a stake in this asset class are in it for the long haul," she said.

Tenants have continued to seek out new, more efficient space -- and developers are eager to offer it. The MOB sector added over 16 million square feet of new space last year, despite rising labor and materials prices that drove up median per project costs by around 20% for both medical offices and hospitals in 2017, according to Colliers International's new 2018 Healthcare Marketplace report.

With about 360 MOB projects under construction, completions are forecast to increase 26.5% this year to 20.5 million square feet with a total construction value estimated at $8.6 billion for 2018, up from $6.6 billion last year and 2016's $8 billion.

Not surprisingly, the big population states of California, Florida, New York, Pennsylvania and Texas dominate the MOB construction pipeline with a combined total of 63.8 million square feet in current and planned projects, with those five states accounting for 37% of the total U.S. total pipeline. Off-campus outpatient properties account for 72% of projects opened in 2017 and 70% of those set to deliver in 2018, Colliers said.

Outpatient health care real estate development projects totaling more than 34 million square feet either started construction or were completed in 2017, a significant total but still a 4.6% drop from the prior year, according to the second annual Outpatient Healthcare Real Estate Development Survey from research firm Revista and Minneapolis-based Healthcare Real Estate Insights (HREI).

While outpatient construction starts have pulled back from their highs in 2015, the pace of development appears to be picking up and Revista expects starts to rebound in 2018, says co-founder and Principal Mike Hargrave.

The top five outpatient developers by square footage started or completed last year were MedCraft Healthcare Real Estate, Healthcare Realty Trust, NexCore Group, HTA Development and Realty Trust Group, with Rendina Healthcare Real Estate and Ryan Companies in the top 10, according to Revista.

One of the largest health care REITs, Healthcare Trust of America, Inc. (NYSE: HTA), expects to focus more on development this year as it digests $2.7 billion in 2017 acquisitions, including the massive Duke Realty portfolio purchase. HTA has delivered three MOBs since the third quarter of 2017 and expects two more properties worth a combined $38.8 million in investment to come online in the second quarter.

Analysts see MOB REITs largely remaining on the sidelines this year, possibly opening the market to other investors.

"Given the spike in interest rates and compressing cap rates resulting in a narrowing of spread to investment, we think the public MOB REITs will be inclined to slow their acquisitions pace and use cash flows to de-lever incrementally," Stifel & Associates analyst Chad Vancore said. "We believe medical office buildings continue to have the most compelling fundamentals among health care REIT asset classes as demand for space is driven by growth in outpatient services and increased health care expenditures."

GET IN TOUCH        Contact CoStar News Team:

 Find us on 

Welcome To CoStar's
Award-Winning News

Winner of three Journalism Awards from the National Association of Real Estate Editors (NAREE)

Award-Winning News