Prognosis Positive: Experts Bullish on Healthcare Real Estate

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Paul Zeman, Partner, Healthcare Real Estate Services

It’s the rare person who likes to go to the doctor’s office. But it’s the rare commercial real estate investor who wouldn’t like to sink some of his or her money into a doctor’s office. 

On the “Commercial Real Estate Show,” my guests and I discussed the seemingly always-healthy medical office property market.

Paul Zeman, a partner with Bull Realty and director of Healthcare Real Estate Services, put it succinctly: “[The medical office sector] is still considered a safe haven. In my opinion, it’s one of the strongest sectors in commercial real estate.”

Dan Fasulo, managing director of Real Capital Analytics, came armed with statistics corroborating our positive assessments of the sector. “We did more than $3 billion worth of transaction activity in 2011, and while that’s not peak-level activity, which we recorded in 2006 and 2007, we’re not too far off,” he said.

Dan Fasulo, Managing Director, Real Capital Analytics

“It tells me there’s tremendous demand for [medical office buildings],” Fasulo added. “All you’ve got to do is look at the demographic charts to get excited about the potential for medical office and the related facilities. We have a lot of the population heading toward the part of their lives when they need the service providers that are going to be in these types of buildings.”

Cap rates have compressed significantly during the past two years, and the nationwide average is just above 7 percent, according to Fasulo, who quickly noted the rates can vary widely depending on the area and specific property type.

While there has been increasing demand for off-campus facilities, medical offices located on hospital campuses still are fetching the highest prices and the lowest cap rates, Zeman noted.

Limited Effect of Healthcare Legislation

Even though the fate of the sweeping federal healthcare law is unclear, medical tenants are not letting the uncertainty keep them from pulling the trigger on long-term leases, observed Shane Seitz, vice president of investments for Ventas REIT, which owns or manages 21 million square feet of medical office properties.

“Within the last few months, we’ve seen a [leasing] uptick where physicians are finally saying, ‘We need to lock up our space. We need to know that we’ve got a good space to practice for the long term. Whatever happens, happens … Let’s just get our space taken care of and move forward,” Seitz said.

Beneficial Effect of Limited Construction

Shane Seitz, VP Investments, Ventas REIT

In more good news, the lack of new construction could set the stage for a jump in the value of existing medical office properties, I noted during the show. “I think in this and in a lot of sectors, five years down the road, we could be surprised at what could happen to values,” I said. “At least I’m hoping – I want to be doing the ‘Snoopy dance’ in about five years.’”

Perhaps not surprising given the overall lack of new construction, my guests said they’ve seen virtually no spec construction in the medical office sector. Instead, developers are opting to “saddle up tight with an established healthcare system and get some commitment before a shovel goes in the ground,” Zeman said.

As the show drew to a close, I summarized the sentiments expressed during the preceding hour when I said, “I think it’s an incredible sector and is one that has a lot of opportunities for growth.”

In other words, when it comes to commercial real estate, the doctors are in.

We covered more healthcare real estate market intelligence on the show. Here is a link to the commercial free 39 minute podcast:  Healthcare Real Estate Update.

Michael Bull
Show Host, Commercial Real Estate Show

President, Bull Realty, Inc