Retail investors are snapping up medical office buildings, and activity in the sector could have implications for ASC operators, according to Hammond Hanlon Camp Vice President Matthew Tarpley.
Note: Responses were lightly edited for style and clarity.
Question: A recent H2C report showed there were few new entrants in the medical office building sector in the first quarter. Why do you think that was the case?
Matthew Tarpley: Despite significant interest from new entrants, which have put forth quality offers on medical office buildings brought to market, new entrants were overshadowed by more traditional medical office building investors. These investors were aggressive buyers at slightly lower cap rates than past acquisition yields seeking to satisfy their appetites for new purchases.
Retail investors were among the new entrants in the medical office building sector in the first quarter. A lot of the typical retail investors are looking outside of their normal parameters because of the recent wave of retailers that are struggling. Retail investors view healthcare tenants as "stickier." Additionally, the potential for mergers and acquisitions in the healthcare space is substantially higher, and this could lead to future credit enhancements. Several funds that were not typically looking at healthcare as of 24 to 36 months ago have become active healthcare asset buyers — for example, Broadstone and Angelo Gordon.
Q: What do you expect medical office building transaction activity will look like in the second quarter and for the remainder of 2019?
MT: There are several notable large transactions that we're aware of under contract, and the competition level for "mid-sized" deals ($10 million to $35 million) has never been more intense. We've also seen data from Preqin that shows more "dry powder" allocated to real estate than ever before ($2 trillion). Rates seem to be flat or even potentially moving downward, which leads us to believe that we're in a pocket in the market and there is runway to sell into this space.
Q: Why should ASC operators be watching the level of activity in the medical office building sector? In other words, how can a dip or surge in activity affect surgery centers?
MT: For ASC operators that own their real estate, a strong medical office building market typically translates to higher [property company] values. The investor pool is largely the same, with some minor exceptions.
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