Medical office buildings: Time to sell?

The relative stability of this sector of the real estate market is attracting more investment and interest from large players, experts say.

By Victoria Stagg Elliott — Posted May 24, 2010

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If physicians who own a medical office building are interested in selling, they might have some big-monied investors as buyers, according to industry experts.

Real estate investors scarred by the recent volatility of other investments are looking for stable places to put their money, but there are not enough of these types of buildings to meet demand, according to several presentations at the 2010 Medical Office Buildings & Healthcare Facilities Conference in Chicago May 5-7.

"It's an excellent time to consider selling. It's the one commercial real estate sector that is attractive to investors right now," said P.J. Camp, managing director in Shattuck Hammond Partners' New York office. He participated in several panels at the conference.

Attendees included several hundred people who own, manage, lease and arrange funding to build medical facilities. Their mood was in stark contrast to a year ago. Then, the economic downturn and credit freeze meant that few new projects could get funding, and not many established medical office buildings were bought or sold.

"What a difference a year makes. The debt markets have opened up, and we are once more making deals," said Shawn Janus, managing director of national health care practice at Jones Lang LaSalle in Chicago.

Over the past few months, there has been a noticeable thaw, industry experts said. The ability for hospitals to raise funds to build these kinds of projects is starting to return. Public and private real estate investment trusts have gathered significant cash and announced they are looking for investment opportunities. In the wake of the recent recession, assets that did not lose much value, such as medical office buildings, have a lot of appeal.

"This market caused some people to look at health care real estate who would not have looked at it before," said Jonathan Winer, executive vice president of Seavest Inc. in White Plains, N.Y.

For instance, according to a report on the first quarter of 2010 released by Real Capital Analytics, a New York-based market research company, medical office buildings sold for an average of $230 per square foot. This represented an increase of 1% over the past year. Other types of offices sold for $165 a square foot, a decline of 39%.

What's in demand

Large buildings on hospital campuses with long-term stable tenants traditionally have garnered the most interest. But smaller off-campus buildings also are becoming attractive, in part because there are not enough on-campus facilities to sate investor demand.

Many at the conference also suspected that health system reform will bring an emphasis on efficiency and lowering costs, and continue the overall trend of moving care from the inpatient to outpatient setting.

Expected increases in capital gains taxes also could make a sale more attractive for physician owners, experts said. In addition, investor interest may wane once other types of office buildings regain value.

"When other assets comes back, health care is not going to be seen as being so great," Camp said.

But while the mood at the meeting was generally positive, there was still some uncertainty.

The impact of health system reform on demand for medical office space remains unclear for the most part, experts said. And while investment is coming back, it's not at the level of three or four years ago.

"The market is certainly improving, but it is not yet stable," said Jim Moloney, managing director and head of real estate at Cain Brothers & Co. in San Francisco. "It's still difficult to finance a lot of development projects. We're a long way from where we were."

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