Why Sell Your Medical Office Building Now?
As with most complex financial decisions, the answer to the question “should I sell my medical building now?” depends on your particular financial and business operations (in the case of medical owner provider-owners) goals. In the case of provider owners, issues such as practice succession planning, the ability to attract new partners, redeployment of capital for operations and expansion are to be considered in arriving at the sale decision. However, from a macro-market perspective the answer is YES for three reasons.
1. Healthcare Real Estate Asset Values are Currently at an All-Time Historical High
The primary metric for evaluating and pricing healthcare real estate assets is capitalization rate on net operating income. Currently, cap rates are at a historical all time low meaning values are at a corresponding high. While cap rates have eased over the last 8 years, they have consistently trended lower, with the exception of a brief period through the Covid-19 pandemic. Cap Rates are now historically very low.
This situation is also reflected in the price per square foot medical real estate assets are attracting, in many cases being at an all-time high.
2. Get Ahead of the Trend
As with all commercial real estate sectors, healthcare real estate is vulnerable to macro-economic trends. While the prevailing economic trends of inflation and rising interest rates have so far had a limited effect on HRE asset pricing (as cap rates are stable), industry experts agree we clearly have entered a period of “price discovery” to the downside.
Historically high inflation is having a substantial effect on medical office construction costs, rents and expenses leading to a forward-looking impact on net operating income and hence, valuations. Operating expenses are rising aggressively putting economic pressure on tenants with net leases and owners with gross or modified gross leases. Substantial increases in operating expenses make it difficult to increase rents in the net lease situation and directly reduce net operating income in the gross and modified gross lease space.
Additionally, HRE lease escalations (usually annually) at the common 2-4% range are not even close to keeping pace with the inflationary environment.
Rising interest rates directly impact valuations. As buyer’s cost of capital increases, so too must cap rates to maintain desired yield parameters. As the market currently shows, buyers and sellers are grappling with this factor in coming to new valuations for assets. As industry experts, we see this evolving to the downside, although marginally, due to the high volume of capital in the HRE space. The competition for medical real estate assets is still very fierce with many investors planning to increase their volume of purchases to take advantage of the current environment.
3. Well Capitalized Investors Targeting HRE Assets
Moderating against the negative macro-economic landscape demonstrates the ability of the HRE sector to show resilience and weather the pressures as well or better than other commercial real estate sectors. The sector’s resiliency, as well as strong underlying demographic and operational fundamentals, has maintained investor appetite for healthcare real estate. Occupancy and rental rate growth continue to be very aggressive. As yields for traditional real estate asset classes compress, we expect to see more investors, institutional and private alike, pour capital into the medical office sector in search of higher yields and a safer investment alternative.
Investors understanding of the “recession resistant” nature of the HRE sector is very much currently front and center when deploying capital. We are seeing new investor entrants into the HRE space from other sectors not as well positioned.
The Key Takeway
Despite the current macro-economic environment, medical office buildings are still very much in demand and there is abundant capital chasing opportunities. Weather the objective is freeing up equity in assets for other needs, leveraging current positions for further growth or executing an exit strategy, it is still a great time to look at asset disposition.