It seems real estate investors can’t get enough of medical office portfolios. Demand for the product type continues to swell, as evidenced by the outsized allocation of capital for investment in healthcare assets. But while overall sales of dedicated medical office buildings larger than 25,000 square foot remains at peak levels of more than $5.0 billion for the third year running,  fewer large portfolios of medical office assets traded than in 2013.

According to JLL’s Capital Markets healthcare experts, transaction volume for medical office portfolios valued at more than $50 million dropped from $1.9 billion across 11 sales in 2013 to $1.4 billion across nine sales in 2014. JLL’s research shows that square footage sold through portfolios has been cut in half over last three years, going from 8.1 million square feet in 2012 to 6.2 million square feet in 2013 to 4.0 million square feet in 2014. This trend illustrates the incredible pressure that major healthcare investors are under to deploy capital when scale opportunities are fewer and fewer.

But with $7.0 billion in new dedicated healthcare investment vehicles entering the market in 2014, the effect of the supply-demand imbalance has become starkly evident in pricing. “Sellers of large medical office portfolios achieved historic pricing in 2014, reaching $342 per foot. This beats 2013 portfolio pricing by $76 per foot and surpasses the peak years of 2006 and 2007 as well” said Mindy Berman, Managing Director at JLL and Healthcare Capital Markets practice lead. Cap rates in the sector have also compressed, with some 2014 portfolios closing in the upper 5.0 percent range, compared to a low of 6.43 percent the previous year.

Added Steven Leathers, Senior Vice President at JLL, “REITs, both public and non-listed, are overwhelmingly the biggest player in the medical office space, and their success in raising capital is the key reason pricing is shooting up. While they are big buyers, they aren’t significant sellers.”   

Capital Surge

Private REITs stepped on stage in 2013 as a growing force in the medical office sector, but the 2014 numbers show what a significant player they have become. Of the total $20.2 billion raised by healthcare REITs last year, $6.1 billion was brought in by non-listed entities. They also accounted for more than half of last year’s medical office portfolio buyers, both in terms of number of transactions and dollars spent.

In all, public healthcare REITs, raised 21.3 percent of total REIT capital in 2014 while they represent a mere 11.5 percent of public equity REIT market capitalization.

Developers Aren’t ‘Digging In’

For hungry healthcare investors, there doesn’t appear to be much relief coming from new construction any time soon. Compared to two years ago, the number of development-driven MOB portfolio sales has plummeted. Only one developer-led portfolio sale closed last year compared to four in 2012, and percentage-wise, that one amounted to 16.9 percent of total sales compared to 45.5 percent two years ago. There was just one developer-led MOB portfolio sale in 2013, but in terms of dollar volume, it was a much larger deal than 2014’s. Daniel Turley, Senior Vice President at JLL chimed in, “Healthcare providers have been steady but cautious about new development activity given ongoing changes in the healthcare landscape.  There just isn’t enough growth to keep up with investor demand.  Additionally, REITs and healthcare providers are increasingly funding development projects with the intention to hold the properties within their portfolio post completion.”

What Buyers Want

Since 2010, investors have flooded to the medical office sector because of more reliable returns than general office investments with less risk. While MOB cap rates still remain above the overall office market average, they too are compressing dramatically, particularly for highly sought after properties, such as new facilities sponsored by hospitals and long-term tenancy. These “trophy” medical offices have broken the 5.0 percent barrier in primary markets and most of these assets are trading at prices above replacement cost.

JLL Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. The firm’s in-depth local market and global investor knowledge delivers the best-in-class solutions for clients — whether a sale, financing, repositioning, advisory or recapitalization execution. In 2014 alone, JLL Capital Markets completed $118 billion in investment sale and debt and equity transactions globally. The firm’s Capital Markets team comprises more than 1,700 specialists, operating all over the globe.

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