Net least options are back in the news as more investors consider alternative investments that offer the opportunity for higher yields and greater stability. Net leases are gaining steam in the retail sector, and now the medical office sector may benefit from the trend. Experts say that they may even be more attractive than retail because the need for human services and care for the aging are only going to grow larger and they won’t go away. An added benefit is that medical building residents often have greater credit that leaves them more likely to be long-term tenants. For more on this continue reading the following article from National Real Estate Investor.
Converging trends have fostered growing attention on the medical sub-sector of netreal estate, with demographics, federal legislation and technological advances all working in tandem.
The aging populace is expected to increasingly seek medical services, and the Affordable Care Act will expand insurance rolls, while improvements in medical services will also heighten demand.
Unlike other net lease tenants that are based on selling products, “you have an industry thatwith the human body and human nature, and that’s not going away any time soon,” says Ben Reinberg, CEO of the Alliance Consolidated Group of Cos. LLC in Bannockburn, Ill.
“There’s a perception that this market is just going to continue to grow,” says Kevin Shields, CEO of Griffin Capital Corp. in El Segundo, Calif.
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Medical tenants are viewed as stable due to the high cost of establishing offices and moving equipment. Some depend on their location near a hospital or other medical offices to reach a steady clientele. “When was the last time your doctor moved?” Griffin asks.
“They invest heavily in sites because they plan to be there a long time,” Reinberg says. “They don’t want to move—it’s expensive.”
Medical tenants also tend to have good credit and leases that provide for rent growth over the term of the lease. Some niches in medical sites are growing rapidly, such as dialysis clinics. Warren Buffett underscored the trend byheavily in DaVita, a dialysis company that recently made headlines by coming under scrutiny for Medicare fraud. Fresenius Medical Care has also been expanding.
These factors have heightened interest in medical net lease assets in recent months, executives say. Assets that sold two years ago at cap rates in the 8 percent to 10 percent range now trade a 7 percent, Reinberg says. Not only has publicity about medical net lease stoked interest, but as with the rest of the net lease market, cheap financing helped compress cap rates. Yet that could shift, given the fluidity of the market.
There are perceived risks among some medical sites. Buildings on hospital campuses or close to strong hospital operators furnish greater security. Buildings farther from hospital campuses may run a greater risk of vacancy.
Cap rates are higher in secondary and tertiary, representing the higher level of risk involved. “You don’t want to be caught with a specialized office that a tenant has vacated,” says Rick Greer, managing director of acquisition with Net Lease Capital Advisors, based where?. “It’s much harder to reposition than if you’re in a primary market, where you have the ability to release it much quicker.”
Alliance Consolidated sticks with medical net lease deals in markets with a population of at least 50,000 within a five-mile radius, Reinberg says. A public company with a few years left on its lease in a small marketplace poses greater risk. Net Lease Capital Advisers prefers deals with properties close to hospital campuses, leased to tenants with credit of B- or better.
“Health care is going to be a growing field, and it’s something we’re going to continue to pursue and acquire,” Reinberg says.
This article was republished with permission from National Real Estate Investor.