Medical Office Sector Ramps Up

Mar 22, 2010 3:54 PM, By Sibley Fleming, NREI managing editor

Investors aren't waiting for the outcome of the healthcare debate before they inject their capital into the medical real estate sector. After a year of inactivity, hospitals are expanding again and investors are realizing that demand for medical office space, by most measures, is inexhaustible.

Last year, transaction volume for medical office properties valued at $1 million or more was down by more than half from 2008 totals, both by the number of deals and by dollar amount. In 2008, there were 891 transactions with a total value of $4.3 billion. In 2009, just 420 medical office deals, valued at $1.9 billion, closed.

“In 2009, you were very challenged to put together transactions in excess of $10 million,” says Alan Pontius, managing director of the healthcare real estate group at Marcus & Millichap Real Estate Investment Services, in the firm's San Francisco office.

Now deals are beginning to accelerate. In December, Marcus & Millichap brokered the $16.7 million sale of Hampden Place Medical Center, a 66,339 sq. ft. Class-A medical office building in Englewood, Colo.

In mid-2009, the asset couldn't trade even at a generous capitalization rate of 8.5%, Pontius says. But in December, the property “comfortably” sold at an 8.25% cap rate. “That is an example of how the overall market has come back around,” says Pontius.

Hampden Place isn't on a medical campus, but it is within a few blocks of the Swedish Medical Center and Porter Adventist Hospital campuses. The property also is an outpatient facility that houses a broad array of services, including an ambulatory surgery center, medical imaging, physiotherapy and medical offices for orthopedic, hematology-oncology and other physicians.

In short, Hampden Place is a great example of the type of asset lenders and investors are targeting these days. “Investment-grade medical office has not been necessarily recession-proof, but it has been recession-resistant,” says Jeffrey Cooper, executive managing director of Savills US, who works in the London-based company's New York office.

Cooper defines institutional-grade properties as on-campus buildings or properties associated with healthcare systems. Read Full Article