As reported on Feb. 21, new York City-based ING Clarion Partners continues to spread its net wide in the field of alternative investments. The focus of this latest play is a national $90-million joint venture the investment adviser struck with Montecito Medical Investment Co. of Santa Barbara, CA to acquire medical office facilities throughout the US. Various subsectors of the medical niche–nursing homes for instance–have long been targets for alternative plays. How ING sees the initiative playing out against the greater backdrop of its overall investment strategy was the main focus of conversation when Edward M. Rotter, managing director in the acquisitions group, sat down with for an exclusive interview. Congratulations on the medical acquisitions you made.

Rotter: We’re very excited about it. It’s an area we’ll continue to invest in and we got in ahead of the curve, at least on the institutional side of the market. It’s a really good opportunity for a number of our clients. Medical certainly is ever green. Speak to that trend and why it’s right for ING now.

Rotter: In terms of our own research, the demographics are very favorable for continued growth in the asset class. Look at some of the drivers behind medical office: Healthcare expenditures will continue to grow because of the baby boomers, and we’re seeing an increasing emphasis on outpatient care. The cost of building a hospital is more than $1 million per room, and as that continues you’ll have a continuing need for additional alternate space. It’s a major driver and one of the reasons it’s attractive to us. Various aspects of the medical niche have been favored for so long, it’s surprising more people haven’t gotten into it.

Rotter: Some people got in too early, and that was the problem. People saw it was going to happen, got in prematurely and were maybe premature in the type of product they were supplying to the industry. How do you see your strategy rolling out nationally?

Rotter: We’ve bought approximately 500,000 sf in four buildings, and we have a number of other buildings that are currently under negotiation that will be added to this fund. Can you elaborate?

Rotter: Not at the moment, since they’re under negotiation. But we’re targeting similar properties to those just announced. We like the Sunbelt markets and the Eastern Seaboard as well as Arizona and Texas. The growth in the population, especially senior demographics, is a positive in the locations we’re choosing. Will it always be with Montecito?

Rotter: We currently have a partnership with them and we selected them because of the team they have in place and because of the opportunity, but we’ll continue to explore this area. Would we preclude doing other deals in this space? Perhaps with some of our other funds and separate accounts, no. So where do you see the initiative being in year? How quickly do you see your rollout?

Rotter: We don’t have a target for the ultimate portfolio size. We look at the landscape on a deal-by-deal basis and the particular fundamentals at the time. As we go forward, I see it becoming a bigger piece of our business. We like the opportunity and think it’s a place you can invest and have core-asset characteristics and get more like core-plus returns. With cap rates getting lower in a lot of the basic food groups, if you can find something that provides a little diversification and slightly better return, that’s good. Are you finding the field getting a bit crowded, as seems to be happening in other alternative areas?

Rotter: We’ve looked at senior housing and student housing, and I think those are more choked than medical-office holdings. There are a lot of non-institutional holders in this space. Studies I’ve seen show that less than 3% of holdings were institutional. Is your focus going to be on value-add?

Rotter: It’s both existing and value-add. If we see what we consider more of a core medical office property at an attractive cap rate, we’ll acquire it. A lot of these properties, even those that are core, are run by mom-and-pop shops, local groups that own one or two properties, and you can buy these at a better cap rate and manage them more efficiently. So what is your hold, both on existing and value-add?

Rotter: It’s a range anywhere from five to 10 years. We’re not looking for a quick flip on these transactions. Generally, what we’re seeing in the product, and it varies depending on whether there is lease-up risk or not, is 50 to 100 basis points above what you would see on a typical or similar office building. And that’s across the board. If you’re in a downtown location, the spread is less, but in the suburban markets you’re probably getting into the 100 basic-point area.

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