There's growing investor interest because of national demographics, continued growth in outpatient services and relatively stable tenancy—and the Southern California region is certainly no exception, adds Joe Euphrat, managing director of capital markets at Jones Lang LaSalle. "That SoCal interest is fueled by regional demographics—size of the population at 22 million, aging and healthcare coverage—and the healthy, yet competitive and well-funded healthcare provider market that's allowing so many systems to pursue outpatient strategies to bolster their market share."

The US overall is aging. Fifty years ago, one in 10 Americans was 65 years or older; today, it's one in eight and by 2030, it will likely be one in five. That only adds to the investment attraction, explains Jonathan Hakakha, managing director of Los Angeles-based Quantum Capital Partners Inc. "When you combine the increased population of older Americans with longer life expectancies, the result is an increased demand for healthcare-related services," he says. "The healthcare industry currently accounts for 18% of US GDP. Though not recession proof, the industry is recession-resistant. Investors and lenders are starting to understand the unique opportunities in healthcarerelated real estate."

Just a few years ago, investors viewed medical facilities as too complicated or specialized to consider, notes Steve Pellegren, Bernards' vice president of preconstruction services. "Add to that improvements in technology that require revamping of facilities and the need to upgrade existing facilities to meet California's Office of Statewide Health Planning & Development standards," he relates.

But countering that argument of a market too specialized is an interesting trend, according to Voit's Dok: the new investor. "It's been said that the only thing wrong with a medical building is that it's full of doctors, but the problem is also the solution, and the doctors have figured out that it is a great time to buy." He points out that the investors who would typically be buying these assets are now facing competition from the doctors themselves.

Looking back at historical transactions of MOBs, excluding REITs, 85% of all sales in the past 18 to 24 months have been to owner-users, Dok explains. "Physicians are extremely credit-worthy borrowers with, in most cases, substantial net worth. Many doctors have realized that they can purchase a medical building for less money than it would take to renew their current lease. They can put 10% down and lock in an attractive financing rate, and lenders are eager to provide them with loans."

Dok points to a deal Voit's healthcare group is currently working on, where the firm is assisting a medical group in the purchase of a 35,000-square-foot medical building in San Diego. "We advised our client—a group of physicians—that they could acquire the property for less cost than it would take to renew their lease," he says. "In fact, by the time they acquire the building and put substantial improvements into it, they will still be spending less than if they were to renew their lease at their existing location.

"The medical group is actually buying more space than it really needs," Dok continues, "because the property is so affordable and financing is available for such a competitive rate. The group of physicians plans to offer space to their colleagues and medical specialties as subtenants."

CBRE's Beam is also seeing this in Southern California. There's a group of 40 doctors looking to build their own building in Chino Hills, he notes, but "most doctors are more focused on how they'll align with a health system or medical group." As such, he says, this trend is still a little spotty.

But another physician trend, he notes, is doctors' "willingness to look at retail spaces as possible locations. Retail generally has adequate parking and allows them to create identity away from a hospital campus."

Yet investment-savvy doctors aren't the only players in this increasingly popular field, and the current dynamics of traditional investment food groups are making healthcare attractive to capital in pursuit of higher risk-adjusted returns. Explains Steven Orchard, an SVP in the L.A. office of George Smith Partners: multifamily is over-heated, office and retail are still reeling from economic structural shifts, industrial is a limited market and hospitality is volatile.

"Institutional investors used to marginalize healthcare due to the operating complexity associated with it," Orchard adds. "Healthcare properties typically involve more than just a building and a tenant. They're specialized for their given purpose and depend on unique operational capabilities," which are all a difficult risk for a passive investor. But today, he points out, "investors are increasingly willing to underwrite it in light of the yield premiums it promises.

"While multifamily construction might underwrite to a 6.5% stable return on cost and a 5.75% exit cap rate—in other words, skinny, with no room for error—an assisted living project might offer a 14% return on cost and a 7.5% exit cap—i.e. fat, even if you miss pro forma," Orchard continues. "That yield premium is catching the attention of major investors, and they are willing and able to understand the complexity in order to get a piece of it."

Over the past 12 months, cap rates for investment-grade medical office buildings have declined as a result of low interest rates and a relative lack of suitable properties being offered for purchase, says Chris Armes, a VP with Cassidy Turley. "The vast majority of quality medical office buildings are still owned by nonprofit and for-profit healthcare systems, which, to date, are not motivated to monetize these assets," he says.

Most of the major healthcare systems, Armes adds, are taking a watch-and-wait position and "seem content to maintain the status quo when it comes to ownership of their core real estate." However, he adds, when the healthcare systems have a need to add new office space, they usually turn to private developers or REITs to fund development costs. "The traded and non-traded healthcare REITs still account for the majority of medical office purchases of existing buildings."

The recent decrease in cap rates for institutional-quality medical buildings can be explained by the sharp decrease in supply for these assets nationwide, adds Cassidy Turley vice president Rob Black. "An institutional-quality asset is a class A or B building that's on or adjacent to a health system or is majority occupied by a health system on a strategic off-campus basis, with well over 50% of the institutional-quality medical asset being owned by the health system itself," he explains.

Unlike retail and hospitality development, which are discretionary, medical facilities serve a very real need, points out Greg Simons, an executive vice president with Bernards. "With the population growing older and sicker and the new federal healthcare law adding 30 million patients to the ranks of the insured, the need for additional healthcare facilities will grow exponentially," he says. "More comprehensive care will be provided in a medical office setting to reduce costs by limiting inpatient care and emergency room visits."

That "medical home" concept is already being piloted by healthcare providers throughout the nation, adds Simons, and "medical centers are preparing for the change." He points out that his firm is currently under way on a $15-million medical office building at White Memorial Medical Center near Downtown Los Angeles, because the hospital's two existing medical office buildings are already operating at full capacity. The 41,000-square-foot building will accommodate about 15 additional medical practices, he says.

According to CBRE's Beam, the headwinds of healthcare reform, market consolidation and closures facing the sector are making it harder for doctors, hospitals and health systems to make decisions. But, he says, "Fundamentally, the value of any individual property is highly dependent on its sponsorship by a market-dominant, well-financed hospital or health system."