After a somewhat slow first half for MOB sales in 2021, the volume roared back in the third quarter (3Q).
During Revista’s recent 3Q webcast, Principal Mike Hargrave data showing that the volume in the third quarter was, preliminarily, $4.6 billion, the second highest quarterly total – behind the $4.9 billion of sales in Q2 2017 — since Revista began tracking such data in 2015.
“The overall theme of this webcast is that medical office buildings and healthcare real estate had a very strong quarter,” Hargrave said, adding that the strong quarter was “representative of the current overall state of the sector.”
That strong Q3 put year-to-date MOB sales for 2021 at $9.6 billion, all but assuring that the sector will reach seven straight years of topping $10 billion in sales — a benchmark indicating that the sector is one of the most desirable asset classes among investors of all types.
“In addition to strong sales during the third quarter, MOB sales on a trailing 12-month (TTM) basis, at $13.7 billion, was the highest we’ve seen in several years,” he added. The last time MOB sales on a TTM basis were higher than $13.7 billion was in Q1 2018, when sales were $14.6 billion (TTM).
Mr. Hargrave was joined on the webcast by another Revista principal, Hilda Martin, who presented the most recent data concerning MOB and hospital construction as well as other data.
Although capitalization (cap) rates, or first-year estimated returns, remained low during Q3, averaging 6.3 percent, perhaps the most telling data concerning the sector was that MOB portfolio sales totaled $2.9 billion in Q3, accounting for about 63 percent of the total volume and indicating strong demand from investors for higher-priced deals.
Also joining the webcast and offering insight into why institutional investors have become so interested and active in the MOB sector was Andrew Pyke, the senior director of real estate alternatives and the head of healthcare real estate with Chicago-based Nuveen Real Estate, the asset manager for and a subsidiary of New York-based TIAA (Teachers Insurance and Annuity Association of America), a financial planning firm.
“We started investing in life science facilities in 2015 and started evaluating medical office in 2018,” Mr. Pyke said. “And while we saw opportunity there, I took us about six to 12 months to really understand the space and understand the attractive fundamentals. We like the aging demographics and overall demographics, and we like the change in the reimbursements … the change to value-based care, which is expanding to procedures being done off-campus, out of the hospital.”
Because Nuveen’s HRE team was small at the time and “we realized did not have much expertise as we thought we needed, we started talking to healthcare real estate groups that have been in the space a long time and have great relationships with providers and really understand the operations of the users in the space.”
So far, Nuveen has partnered on investments in the space with the likes of White Plains, N.Y.-based Seavest Healthcare Properties, Denver-based NexCore Group LLC, and Nashville, Tenn.-based Healthcare Realty Trust (NYSE: HR), a publicly traded real estate investment trust (REIT).
“We’ve been very fortunate to partner with those firms and the investment performance has been great,” Mr. Pyke noted.
Although Mr. Pyke did not break down how much Nuveen has invested in MOBs, he did say the firm has invested a total of about “$2.5 billion in healthcare between life science, senior housing and medical office,” with more investments planned in MOBs in the years to come, he said.
“When we started investing in and targeting medical office and where we wanted to place our money,” he added, “we were attracted to the off-campus, outpatient settings with higher acuity space. We like higher acuity, as a lot of the equipment and machinery cannot be moved. And this type of space will be less impacted by telehealth, as the patient needs to be there in person. As we are seeing, so much of what attracted us to the space pre-COVID-19-pandemic, and post-pandemic has been reinforced, as it looks more and more like patients are less comfortable going into the hospital and are more comfortable getting their care in outpatient settings.”
As for pricing for MOBs, Hargrave noted that the average cap rate on a trailing 12-month basis in 3Q was 6.3 percent, with on-campus MOBs averaging about 5.8 percent and off-campus properties trading at an average cap rate of 6.4 percent.
“We’re seeing cap rate compression, even in the last year, as the overall cap rate has dropped slightly since the third quarter of last year,” Mr. Hargrave said, adding that the average cap rate for on-campus MOBs fell from 6 percent in Q3 2020 to 5.8 percent in Q3 of this year.
Although cap rates are at or near historic lows in the MOB sector, the product type is still considered a good “value play” to many investors, especially those who have been involved in mutlifamily and industrial properties, Mr. Pyke noted, adding that medical office is currently one of the sought-after real estate investment types.
“Multifamily and industrial are probably the two sectors that everybody knows as outperforming when it comes to market fundamentals, (with cap rates) in the mid- to low-3 percent caps,” he said. “In addition, traditional office and retail are difficult property types to invest in right now given their challenges.
“It’s why we like medical office as a relative value play, and we are certainly not alone as more and more institutional investors are looking to the property type and its long-term, favorable demographics trends, with pricing in the low-5s to high-4s, and they will probably continue to tighten from there, as … long-term leases to investment-grade credit tenants is an attractive investment opportunity.”
As for the composition of the MOB buyer pool, Hargrave presented data showing that private equity investors continued to dominate by accounting for about 75 percent of all acquisitions in Q3. That figure was up significantly from a quarter earlier, when private equity accounted for 53 percent of all MOB purchases but was in keeping with most quarter dating back to Q3 2018, since which time the investor type has dominated the market.
The country’s healthcare-focused REITs, which were on the sidelines in mid-2020 during the throes of the pandemic, have rebounded recently by accounting for more than 20 percent of all MOB purchases in three of the last four quarters. In Q3 they accounted for 21 percent of MOB purchases.
Even though the COVID-19 pandemic has caused plenty of disruptions in the MOB development sector – mainly by delaying the completions of projects already started — the number of projects getting underway has remained strong, including in Q3, according to data presented by Martin.
In fact, according to Revista’s Q3 data, 23,7 million square feet of MOB projects were started on a TTM basis. That was the highest total since Q4 2019. She added that the actual amount of MOB projects started during – not on a TTM basis – was a “very strong” 7.5 million square feet.
“This really demonstrates the strong demand for new medical office space,” Martin said, adding that despite effects from the pandemic – such as supply chain issues, rising labor costs and pricing inflation – not many projects had their start dates delayed.
The presentation also covered a variety of other statistics, including MOB rents, which have increased slightly, and others. For a link to the webcast, please visit us02web.zoom.us