X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.

WASHINGTON, DC—When health insurance reform legislation passed earlier this year, the medical office building sub-sector assumed it would lead to growth and possibly even more favorable financing. Several weeks later it is reconsidering those early assumptions, says Northmarq Investment Services’ Jim Kornick. Still, fundamentals and financing is favorable enough that it can afford to wait and see.

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.

Want to continue reading?
Become a Free ALM Digital Reader.

Once you are an ALM digital member, you’ll receive:

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications

*May exclude premium content
Already have an account?

Dig Deeper

 

GlobeSt

Join GlobeSt

Don't miss crucial news and insights you need to make informed commercial real estate decisions. Join GlobeSt.com now!

  • Free unlimited access to GlobeSt.com's trusted and independent team of experts who provide commercial real estate owners, investors, developers, brokers and finance professionals with comprehensive coverage, analysis and best practices necessary to innovate and build business.
  • Exclusive discounts on ALM and GlobeSt events.
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com.

Already have an account? Sign In Now
Join GlobeSt
Live Chat

Copyright © 2022 ALM Media Properties, LLC. All Rights Reserved.