Northmarq Investment's Jim Kornick

GlobeSt.com: Medical office buildings don't trade much. Given that, how can we extrapolate anything about the space including the impact of a complex piece of legislation?

Kornick: We can start with the reason why they don't trade much—they are so stable and desirable to investors. There have never been many transactions in any given year and when they do come to market they are fought over.

GlobeSt.com: What about pricing?

Kornick: Now that does change, sometimes dramatically. In the third quarter of last year there were a number of national transactions with Health Care Trust of America, being the most aggressive bidder. They went out there and went crazy, paying prices as much as 8.25% cap. It was perceived by the market as foolish and paying too much. That's since become obvious, because just a quarter or two later pricing has settled around 7.5% cap.

GlobeSt.com: How is financing for medical office these days?

Kornick: Last year the only financing available that made any sense was bank financing —local and regional banks. Any transactions of medical office buildings that did occur were underwritten by banks—it wasn't long term, five years at most and it was recourse.

Now everyone is providing financing now. In Washington, DC, we are a correspondent for 22 life companies—by that I mean we originate and service their loans. Every one of these life companies is in market now and they want to lend in Washington and they want to lend to medical office buildings.

Debt is now available at long-term rates of ten years and it is non-recourse, at a cost of 6%. Banks are still out there lending, but you would be foolish to take it now.

Also, finally, CMBS has re-opened. Not a lot of it has transpired—our shop is working with a couple of CMBS loans, some of which are medical office loans. They are a favored asset class for CMBS because they are a stable cash flow.

GlobeSt.com: Let's talk about the health insurance bill. It was supposed to be good for the sector - now you are saying, maybe not?

Kornick: In theory it is. With all these new insured people entering the market, it is expected there will be more demand for facilities, for offices, etcetera. But I think, and others do to, that the picture is more mixed, now that more details are becoming clear about the bill.

Increased demand doesn't necessarily mean an increase in doctors or more space. Also don't forget that the pressure for health care reform was to control costs and despite the fact that the bill that was passed doesn't do a lot of that, it is inevitable that dramatic cost cutting will happen.

So I do think there will be more demand for medical office space, but not as much as we first anticipated. The rate of health care spending is going to have to come down and that will impact new facilities.