Expect a Jump in Medical Office Cap Rates

SCOTTSDALE, AZ-Medical office cap rates will continue to compress, as long as those transactions involve larger, on-campus facilities. That was the message of panelists here at the RealShare Medical Office Buildings conference yesterday.

Cap rates could reach 2007 levels soon for core products, said Chris Bodnar, vice president of healthcare at CB Richard Ellis Capital Markets, speaking on a panel called “Who are the Active Buyers in the MOB Sector?" More specifically, buildings over 200,000 square feet in core markets will attract a cap rate nearing 7%, said Mike Lincoln, executive vice president of healthcare services at Lillibridge.

And like those assets being purchased, the buyers are large firms as well. “On larger transactions, institutional players are doing the majority of that,” said Toby Scrivner, director of the Stan Johnson Co. Rodnar said that the 35% market share that REITs currently own in the sector is bound to increase.

Naturally, that will happen because those are the firms that have the money right now. “External debt for the buyers is available,” Lincoln said “It’s cheap and ready to be deployed.”

Where are the acquisitions taking place? According to Scrivner, there is a lot of activity right now in Texas and the Southeast. At the bottom of the barrel is Detroit.

In smaller markets, there is a risk when looking at assets, said Danny Prosky, president and chief operating officer of Grubb & Ellis Healthcare REIT II. But nonetheless, his firm is finding low-cost deals in those areas at cap rates between 8.2% and 8.5%. When that changes, though, Grubb will likely stop pursuing in those markets.