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DALLAS-Baylor Health Care System, a major outsourcer of bricks and mortar, expects to decide the fate of its portfolio by the end of April. The hospital giant has interviewed six brokerage houses for the mammoth office contract, which has been split between Nashville-based Healthcare Realty Trust Inc. and Trammell Crow Healthcare Services since 2004.

Baylor’s real estate chief isn’t discussing the competition, but it’s been confirmed that a decision will be made in the coming weeks after months and months of interviews. Dallas-based Baylor has barred all brokerage houses in the final cut from publicly talking about the tug of war.

Sources tell GlobeSt.com that Trammell Crow Healthcare, now technically part of CB Richard Ellis, is pitted against New York City-based Cushman & Wakefield Inc., Houston-based Hines, the Beverly Hills, CA-headquartered Colliers International Inc., and Chicago-based competitors Jones Lang LaSalle and Lillibridge Healthcare Services. In addition to the office space, Baylor’s real estate assets include 20 hospitals, more than 80 primary care centers, 12 rehab clinics, 18 ambulatory surgery centers and Baylor Research Institute. If sources are reading it right, Baylor is looking to outsource facilities management, leasing, acquisitions and development.

Trammell Crow Healthcare had the entire leasing and management contract from 1991 until 2004 until HRT got oversight for more than one million sf of medical office space. At that time, the system had 8.8 million sf on six campuses. Trammell Crow Healthcare, which had a dedicated team of 200 for the account, held onto some management duties and all development rights in the portfolio breakup. Fast forward to last year’s CBRE-TCC merger when the line was drawn between the brokerage and development teams and it’s still unclear where the specialty group will end up.

The Baylor decision is coming at a time when investors’ interest and development are at an all-time high for the healthcare industry. In a recent issue of a healthcare trade magazine, it was reported that $41 billion of projects are under construction nationwide. On the sales front, Real Capital Analytics Inc. tracked $3.47 billion in deals last year.

Historically, healthcare systems have met all real estate needs with in-house teams, but the times are changing. Baylor was a frontrunner for outsourcing its real estate, but since then Memorial Hermann Healthcare System in Houston has followed suit.

“Many brokerage houses have expanded to meet their needs,” Dan Fasulo, director of market research for New York City-based Real Capital Analytics, tells GlobeSt.com. “It makes sense from a lot of different perspectives. Healthcare has been one of the last major segments to give this a thorough look because of the types of facilities that they have.”

The brokerage houses in the running have specialized teams or multi-disciplinary groups to handle the specialty account. It’s no industry secret that CBRE has, on occasion, hired a hospital’s real estate staff and folded it into its operation after winning a contract, according to Fasulo. By doing so, the hospital averts layoffs and an experienced team, familiar with the space and the decision-makers, gets to stay in place–just under a different employer. “It’s pretty commonplace for the major houses to do that, but it’s a case-by-case situation,” he adds.

Although the work is highly specialized, the return apparently outweighs the investment to build a dedicated group as investors take notice of the gains to be made from the healthcare industry’s real estate, particularly medical office space. A Real Capital Analytics’ report shows medical office buildings averaged $238 per sf in closed deals versus $219 per sf in other office product. Medical office cap rates were 7%; all others, 6.3%.

In 2006, only 2% of the medical office buyers were institutions; 3%, funds; 5%, foreign investors; 5%, syndicators; 6%, condo converters; 12%, users and others; 14%, private out-of-state investors; 23%, REITs and publicly traded companies; and 29%, private in-state investors.

“The demographics story is apparent to many investors,” Fasulo says. The caveat, though, is there is more demand than supply. “The demographics are certainly pushing for additional development in medical office,” he adds

Dallas-based L&B Realty Advisors Inc. is one of the few institutions getting into the game. And, its focus is development and turnaround medical properties. The investment adviser opened L&B Medical Properties Partners Fund I in October 2006, which it has just closed to new investors after amassing $68 million in equity. The leveraged play will produce roughly $300 million of medical office space, says Jason Blake, L&B’s director. To date, the fund has invested in 1.3 million sf to reposition or build.

An L&B investor this week planted a $20-million seed to launch a second fund. This time, the capital drive is pushing to raise $100 million of equity.

Blake says research showed the need for development pools, particularly for specialty developers of mini-medical campuses or facilities owned by physicians groups. Like all investment plans, the exit strategy is in place–buyers like Real Capital Analytics’ list.

“Medical REITs are gobbling up stabilized properties. They’re my exit strategy,” Blake says, citing the steadily increasing interest from capital circles. “The institutional world is slowly coming around. They’re there on the stabilized end, but not on the development end. But, it’s slowly coming around.”

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