Crossover Capital Increases Competition for Medical RE

Medical office buildings continue to be favorites of institutional funds and REITs.

SAN FRANCISCO—Strong demographic trends support the growing medical office industry and will remain a driver in investment activity this year, GlobeSt.com learns. As a result, institutional funds and REITs are actively searching for larger deals and portfolios. Private capital is emerging as an option in the $5 million to $20 million price tranche and could begin to take a larger share of transactions this year, according to Marcus & Millichap’s latest medical office research report. A rise in crossover capital is also increasing competition for medical office properties as single-tenant retail investors target similar investment opportunities in this segment for higher yields.

For-sale inventory is limited as medical office assets are in high demand with cap rates compressing during the past several years. However, on-campus medical office buildings command premium cap rates, trading at sub-6% initial yields for single-tenant properties, while multi-tenant buildings draw first-year returns in the mid-6 to low-7% range. Off-campus medical office properties with strong tenancy, which often include a healthcare system and long remaining lease terms, are also in high demand. These properties fetch initial returns in the mid-6% area. Yields on other off-campus medical assets, including those in need of repositioning or located in secondary or tertiary markets, can trade up to 200 basis points higher. Factors such as quality, location, deferred maintenance and tenancy have an impact on returns for these assets, says Marcus & Millichap.