CHICAGO—The single tenant medical sector remained popular with investors through the first three quarters of 2017, and several demographic factors will likely sustain that interest over the next few years, regardless of the changes in the nation's political landscape.
Third-quarter cap rates in this sector, defined as medical assets priced under $10 million, compressed by 25 bps when compared to last year, and now stand at 6.25%, according to a new report from The Boulder Group, a single tenant net lease firm in suburban Chicago. That's just above the rates for the overall net lease market, which remained relatively steady,
“There have been no major changes to the healthcare system in the last year, and the consensus is not forecasting major changes moving forward,” Randy Blankstein, president of Boulder, tells GlobeSt.com. Furthermore, “the nation's aging population is the most important factor sustaining demand.”
Certain portions of the medical market attract even more interest. The dialysis sub-sector, which includes tenants Fresenius and DaVita, saw its median rate compress 28 bps, the most of any type. At 6.1%, they have the lowest cap rates in the net lease medical sector. Boulder attributes this to the long-term leases with rental escalations that these two tenants frequently have. In the third quarter of 2017, net lease dialysis properties made up more than 45% of the overall net lease medical supply.
A Fresenius location in Chicago, for example, with 15 years left on its lease, was sold last August for $8.2 million, or $525 per square foot, and with a cap rate of 5.9%. One of the most expensive deals in the quarter was for a Satellite Healthcare dialysis facility in San Jose with 16 years remaining. It was bought in August for almost $9.8 million, or $951 per square foot, at a cap rate of 5.35%.
The nation's aging demographic, as well as its resistance to e-commerce, will keep healthcare properties quite attractive. Still, the net lease medical sector has a high concentration of non-investment grade rated tenants, which explains why rates are a bit lower in the overall net lease market. In the third quarter of 2017, non-investment grade tenants comprised about 68% of the total supply.
But private and 1031 investors should continue to find the lower price points associated with medical properties quite appealing. In the third quarter of 2017, the median price of net lease medical properties was approximately $2.7 million. And in 2017, private and 1031 investors were the buyers of 66% of the net lease medical properties sold.
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
