Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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Accelerating the Pace While this change in the hospital business model began long before the Afordable Care Act was signed, this law changes the medical landscape signifcantly and accelerates the pace of pushing outpatient services away from acute care hospitals. With the expansion of access to healthcare, more patients will be seeking outpatient medical care in the coming years, increasing demand for many of the services typically located in MOBs. Tis means the demand for these types of facilities will continue to grow for the next several years. Changes in how care is administered and paid for as a result of the law could also create more MOB demand. For example, under the new law, hospital systems could receive higher government reimbursements if patient-readmission rates decline. Many hospitals are aligning themselves with other healthcare providers to focus specifcally on the care patients receive when discharged. Post-acute care providers and physicians will have incentives to improve and maintain quality outcomes as well. Tat means healthcare systems are under pressure to ensure that patients follow their doctors' instructions afer in-hospital procedures, for example, making sure a patient undergoes rehabilitation following an inpatient surgical procedure. To make rehabilitation more convenient for patients (and hence lower the risk of an unreimbursed readmission), a hospital may ofer rehabilitation facilities at several sites, each close to hospital-owned physician practices. Investment Opportunity MOBs make attractive investment opportunities for many reasons. Te Afordable Care Act is not the only factor driving growth in the healthcare sector. Te aging U.S. population, with an average of 10,000 baby boomers turning 65 each day, is also increasing demand for medical services. According to the Centers for Medicare and Medicaid Services, $2.7 trillion was spent on healthcare in the United Medical Office Sales Trends 2Q12 Average price psf Average cap rate $195 9% $180 8% $165 Average price psf 10% 7% $150 07 08 09 10 11 Source: Marcus & Millichap Real Estate Investment Services 24 May | June | 2013 12 6% Average cap rate $210 Medical Office at the Mall: Read how medical tenants are backfilling excess retail space in "Shopping Center Shift" on p.26. States in 2011; this is expected to reach nearly $4.8 trillion by 2021. Investments in healthcare facilities are not geographically restricted. Healthcare continues to be a business most infuenced by local market needs. As long as the medical practices located in the building are afliated with a healthcare system or well-capitalized healthcare practice that has a strong area market share and a good mix of private-pay patients, the size of the market is less important. MOBs also tend to have low tenant turnover. Because most physicians' practices need specialized space, depend on being conveniently located to patients and other related practices, and value continuity of location for marketing purposes, there is a higher renewal percentage than is typically seen in commercial ofce buildings. Of course, this is not to say that MOB investments are without risk. If a community's demographics shif or if expected residential growth fails to materialize, tenants in an MOB may not see the demand for services they had expected. As a result they may relocate to a more desirable site closer to their target population. Historically there has been lower investment pricing volatility in the medical facilities real estate market. Regardless of the economic conditions, people will always need healthcare services. Asset prices in the MOB sector are refective of the high levels of tenant retention and demand for space, as well as credit enhancement from hospital systems, as investors compete for the properties that will provide the strongest returns with the lowest volatility. Acquisition cap rates for traditional MOBs are typically between 6.5 percent and 8.0 percent for facilities with material hospital tenancy and longer-term leases, though higher yields can be found in higher acuity and special-purpose buildings. With the U.S. population aging, the Afordable Care Act remaining in place for the near future, and healthcare providers highly motivated to reduce the cost of healthcare delivery while improving quality and customer experience, it seems likely that medical ofce facilities will continue to be attractive investments. Stephen H. Mauldin is the president and chief executive officer of CNL Healthcare Properties. Contact him at Steve.Mauldin@cnl.com. Kevin Maddron is senior managing director of fund management for CNL Financial Group and oversees CNL's senior housing and healthcare investment and asset management activities. Contact him at Kevin.Maddron@cnl.com. Commercial Investment Real Estate