Irvine, CA
Healthcare providers are getting more strategic about their real estate strategy. Providence St. Joseph Health has sold the first phase of a 10-property portfolio totaling 344,000 square feet for $59 million. The properties are located in California, Washington, Oregon and Montana. Providence sold the assets as part of its strategy to optimize operational efficiency and unlock capital, a growing trend in the healthcare market.
"The purpose of this portfolio sale was specifically directed towards freeing up capital tied up in non-strategic assets to be redeployed towards strategic initiatives, which is a trend I see growing with health systems that have real estate portfolios," Garth Hogan, executive managing director of healthcare west at Newmark Knight Frank, tells GlobeSt.com. "Even with the challenges surrounding the Affordable Care Act and its future, healthcare real estate investment remains strong." Hogan represented Providence in the deal, along with Sean Fulp and Mark Schuessler of NKF.
Frank has seen an increase in demand for medical office properties. "Year over year, we've sold medical office assets to investors at low cap rates and within a short amount of time they have realized best-case scenario returns," says Hogan. "Those investors have an increased appetite for more acquisitions. New private equity continues to flood into the market while lenders are loosening up on debt."
In fact, phase two of the remainder of Providence's portfolio sale is already seeing strong interest. "Investors are attempting to submit offers prior to the portfolio going to market," says Hogan. "Phase one achieved values that were higher than projected and we expect the same for phase two. All of the assets can be purchased as a one off, which uniquely maximizes their value allowing relevant buyers in each geographic area to compete."
To make a similar move, healthcare owners should be analyzing their current portfolio to see where they can take advantage of monetization. "Healthcare real estate owners are paying close attention to the strength of their occupancy and their ability to sustain higher rents and long-term leases in the midst of uncertainty," says Hogan. "Assets achieving the highest returns typically have a health system or large physician group anchor that is affiliated with a hospital. Owners should focus leasing efforts on creating a tenant mix that promotes sustainability."
This year, Hogan is expecting to see similar activity in the healthcare and medical office market. "Similar to what we saw in 2019 we expect there will be a recapitalization of large portfolios in 2020, as the healthcare REITs begin to reposition their portfolios," he says. "Private equity funds will take advantage of these opportunities. Savvy health systems will likely begin selling off their non-strategic and non-core assets so that they can reuse the capital for strategic growth initiatives such as increasing their ambulatory network."
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Kelsi Maree Borland
