Since its 1985 IPO, Nationwide Health Properties has amassed a portfolio of more than 400 health- care-related facilities -- senior citizen communities, nursing homes and hospitals -- in 39 states. But it wasn’t until January that the Newport Beach, Californiabased real estate investment trust, which owns properties worth more than $2 billion, added medical office properties to its asset mix, after two years of planning to do so.
Late that month Nationwide announced a joint venture with Broe Cos., a private real estate investment and management firm based in Denver, to buy for $52 million an 800,000-square-foot, six-state portfolio consisting mainly of medical office buildings and properties located on campuses affiliated with Nashville-based Hospital Corp. of America. Nationwide contributed 90 percent of the equity; Broe, 10 percent. The seller was another institutional joint venture, formed in 2003 by Health Care Property Investors of Long Beach, California, and GE Commercial Finance in Stamford, Connecticut.
“We wanted to broaden our portfolio diversification,” says Donald Bradley, Nationwide Health’s chief investment officer. “And we perceive medical office buildings to be less risky than senior housing or skilled nursing.” Doctors tend to be reliable long-term tenants.
Nationwide is hardly alone in seeking additional investments in the medical office sector, which is valued at $250 billion. Typically comprising physician suites and other ancillary health care services, either on or immediately adjacent to hospital grounds, sales of medical office properties totaled $2.1 billion in 2005, up from $1.5 billion in 2003, according to New Yorkbased data provider Real Capital Analytics.
Investor demand reflects a play on graying demographics. Baby boomers -- the eldest of whom turn 60 this year -- are expected to spend more time in their doctors’ offices. And as competition for more traditional properties intensifies, many investors are seeking better-priced alternatives, as well as diversification through nontraditional asset types, such as self-storage facilities (Institutional Investor, August 2005) and student housing (II, September 2005).
“Institutional capital has discovered medical real estate,” declares Jeffrey Cooper, senior managing director of Granite Partners, a New Yorkbased real estate investment banking firm. “This has happened over the past 36 months, and particularly over the past 12 months, in very significant form.”
Recent deals include Indianapolis-based Windrose Medical Properties Trust’s October agreement to pay $241 million for 21 medical office properties and one traditional office building in Arizona, California, Florida and Texas; the February purchase of the leasehold interest in Hackensack University Medical Plaza, a 252,000-square-foot asset on the campus of Hackensack University Medical Center in New Jersey, for $88 million by ProMed Properties, a newly formed subsidiary of real estate investor Gazit-Globe; and the December purchase of Doctors Center Four, a 208,546-square-foot building attached to Saint Joseph’s Hospital, the oldest in Atlanta, for a reported $61 million by Deutsche Bank subsidiary RREEF on behalf of an unnamed institutional client.
Though medical office buildings remain attractively priced relative to many other real estate sectors, they’re less of a bargain than they were a year ago. In the fourth quarter of 2005, medical office buildings across the country were selling for $197.36 per square foot, on average, according to Real Capital Analytics. The average capitalization rate: 7.21 percent. A year earlier comparable properties were selling for an average $182.18 a square foot, with a 7.63 percent cap rate. Medical office cap rates are more attractive than those of shopping malls and other retail properties (6.7 percent) and central business district office buildings (6.5 percent) and are close to those of suburban office space (7.42 percent).
Health care is a fast-changing industry, but patients (and landlords) like doctors to stay put.
