Location is Vital for Healthcare Assets

OAKLAND, CA—The 65 and older population has grown at an annual pace greater than 3% since 2011. This age group is anticipated to increase by 20 million people by 2028 and will comprise 20% of the nation’s population base, so says a mid-year medical office report by Marcus & Millichap.

Furthermore, mergers among healthcare companies and providers has been a driving force behind changes in the industry and how physicians interact with patients. Emerging technologies and a shift in the care delivery model are spilling over into the development of medical offices. A rise in outpatient services and procedures has encouraged medical office development in off-campus locations the past few years. Hospitals and medical providers seek to place offices in neighborhoods and suburban areas, closer to where people live and work, in order to reduce costs and offer convenience to patients seeking medical care.

Recently completed single-tenant medical office assets remain in high demand across both private and institutional buyer segments. Properties with major medical providers or hospital systems backing leases trade at a premium, with first-year returns averaging in the high-5% to low-6% span, says Marcus & Millichap. Sale-leaseback opportunities with private physician groups often require personal guarantees of leases. Many physicians are bringing buildings to market in order to cash in on increased equity as property values have increased during the past few years.

Investors will be mindful of lease terms and are scrutinizing these deals closely as many buyers prefer the longer lease guarantees that come with properties tenanted by a major hospital system or healthcare group. Buildings tenanted by a private physician typically trade 100 basis points above properties leased by major groups. Investors are seeking stabilized multi-tenant medical office properties in primary and secondary markets. Yield spreads between on-campus and off-campus assets have compressed during the past few years, with private investors and institutions expecting similar returns regardless of assets’ proximity to an established hospital, says the Marcus & Millichap report.

“Having a visible outpatient facility that also provides easy access, and convenience for patients and staff has been a growing trend for systems and healthcare providers. Patients often have difficulty navigating the large and often confusing hospital campuses, entrances and large parking garages,” says Meridian’s CEO John Pollock. “It is all about the patient experience. Meridian has seen this trend over the past few years, given the cost advantage and convenience factor of providing services in an outpatient setting as opposed to a higher acuity, higher cost hospital.”

An example of this type of location-sensitive asset is a 12,754-square-foot dialysis clinic in Oakland. Meridian sold the building for $15.7 million, representing a price of $1,230-plus-per-square-foot or a cap rate of 5.1%. The buyer was a Fremont-based family office in a 1031 exchange that was looking to invest in an iconic location with access to the healthcare market.

The outpatient clinic is located at 4242 Broadway in the North Oakland neighborhood in a busy corridor near Kaiser Permanente and Sutter hospitals on Pill Hill. The site is also positioned within proximity to the MacArthur BART station, Interstate 580 freeway and Highway 24, and is adjacent to a variety of retail services.

In 2013, Meridian acquired four lots to create a 19,600-square-foot parcel for ground-up construction of the new outpatient healthcare clinic.

“Given that this requirement was in an extremely tight urban in-fill market, paired with the attractive Oakland market in recent years, this was a difficult type of site to locate,” says Meridian’s senior vice president Mike Conn. “With a little flexibility regarding development style, we were able to deliver a desirable building in a perfect location. Through a coordinated team effort with our client, vendors and the city, we were able to construct the OSHPD 3 clinic in just under 10 months.”

The clinic was completed a year ago, in September 2017.

“Over the past 10 years, we have forged a relationship with the tenant and working together, we were able to secure a site well in advance of the requirement,” Pollock tells GlobeSt.com. “This allowed us to be selective and find just the right location. With Meridian’s capital structure and the tenant’s commitment to the location, we were able to hold the property for several years before commencing construction. The ability to land-bank it for the tenant ended up in our favor with the dramatic increase in prices between 2013 and 2017 in Oakland.”

The site required Meridian to vacate and demolish three different buildings while maintaining the structural integrity of a large retaining wall built into the rear of the buildings.

“The development in Oakland was one of the more difficult projects that Meridian had undertaken from a logistics perspective. Developing a 12,754-square-foot outpatient clinic on a parcel that was less than 20,000 square feet, providing adequate on-grade parking and a single floorplate that would accommodate a dialysis treatment floor was no easy task,” Pollock tells GlobeSt.com. “With thoughtful planning, Meridian was able to assemble the same team that delivered a similar project in the tight urban in-fill market of San Rafael. HKA was our architect, Kier & Wright was our civil engineer and Stevens-Hemingway-Stevens was our general contractor. We also had numerous key subcontractors.”

Chris Sheldon of Cushman and Wakefield, based in the firm’s San Francisco office, represented Meridian in the transaction. The buyer was represented by Bay Area-based The Kase Group.

Since its inception in 1999, Meridian has developed more than 15 dialysis clinics. This is Meridian’s fifth transaction in 2018, having acquired four new buildings earlier this year, on the heels of Meridian’s June 2018 sale of its 104,000-square-foot general office building located at 1000 Marina Blvd. in Brisbane, CA. That purchase price was $39.5 million.