Revista data indicates that the average cap rate was 6.3%
It looks as if the first quarter (1Q) might’ve been the calm before the storm when it comes to MOB sales.
In this case, the “calm” refers to the fact that the sales volume in 1Q was relatively consistent with the volumes recorded in quarters, while the “storm” is likely to entail a significant slowdown in volume in the next quarter or so resulting from the COVID-19 pandemic.
According to Revista’s recently released 1Q 2020 Medical Real Estate Transactions Report, MOB sales totaled $2.5 billion in Q1, down from very strong 4Q 2019 in which the volume was $4.3 billion. However, ever since Revista began compiling MOB sales volumes in 1Q 2015, nine quarters have had volumes of between $1.8 billion and $3 billion.
However, while the $2.5 billion in sales represented the lowest volume in the last four quarters, it was significantly higher than a year earlier, when the volume in 1Q 2019 was just $1.8 billion. After that slow start to 2019, MOB sales came roaring back to finish the year with a total volume of $12.1 billion, marking the third consecutive year in which MOB sales topped $12 billion.
That is not likely to be the case in 2020, according to numerous MOB owners, investors and brokers.
“First quarter volume was strong through mid/late quarter,” says Revista Principal Mike Hargrave, “but as the pandemic started to have an effect on the economy and caused a number of investors and sellers to pause, volume did slow towards the end of 1Q and into 2Q. We anticipate volume will materially slow in the second quarter.”
A number of professionals involved in MOB sales say that demand from a wide variety of investors for the product type remained as strong as it has been in recent up until the onset of the pandemic and stay-at-home orders were enacted in many states.
The average cap rate for MOB sales in 1Q was 6.3 percent, with investors paying a premium for on-campus facilities, which traded at an average cap rate of 5.8 percent. The highest quality MOBs, or those in the lowest quartile of cap rates, traded for an average cap rate of 3.9 percent.
Additional statistics from Revista, which include all transactions topping $2.5 million, shows that, as expected during a downturn, private investors dominated acquisitions in 1Q, accounting for 66 percent of all purchases made.
With their share prices taking a hit at the onset of the pandemic, the country’s healthcare focused real estate investment trusts (REITs) decided to not pursue many new offerings. The REITs made only 19 percent of all MOB purchases in 1Q – the lowest total for the investor group since 1Q 2019. Hospital and health systems accounted for 8 percent.
In its Spring 2020 National Health Real Estate Investor Update newsletter, the U.S. Healthcare Capital Markets team with CBRE Group Inc. (NYSE: CBRE) noted that MOB sales were strong in Q1, with the disruption caused by the COVID-19 pandemic only affecting, for the last few weeks of the quarter.
However, the CBRE team, which is led by Vice Chairman Christopher Bodnar and Lee Asher, writes that because of COVID-19, “the positive healthcare performance and activity of the first quarter will be an unreliable predictor of activity for the remainder of 2020.”
While the pandemic is likely to cause sales to slow down in coming months, many MOB owners report that they feel fortunate to be involved in the space, as many report that they have received about 90 percent, or more, of the rents due since the onset.
In an interview with HREI, Darryl E. Freling, managing principal and co-founder of Dallas-based MedProperties Realty Advisors LLC, which has a 4 million square foot MOB portfolio, said through April and May the company “collected “91 percent of our rents. I mean, that’s extraordinary if you know what’s going on, when you have retail (landlords) collecting 50 percent.”
Because of this, he added that despite the “devastating” effects the pandemic has had on the overall economy and could still have on rents due in coming months, “we remain pretty bullish on healthcare real estate.” The company, he added, is still pursuing deals, adding, “My take on this is there’s opportunity now.”