Healthcare Realty Trust and TIAA Form Medical Office JV

Healthcare Realty Trust and the Teachers Insurance and Annuity Association have formed a joint venture partnership to invest in medical office properties. The partnership plans to acquire $200 million annually in medical office product, and does not plan to place debt on the assets. Healthcare Realty owns a 50% interest in the joint venture, and it will fund share of future investments proportionally.

The joint venture has already completed its first purchase, a 92,139-square-foot building on Allina Healthcare’s Mercy campus in Minneapolis. The property traded hands for $16.6 million at a 5.1% cap rate. The property is currently 80% occupied, and the joint venture plans to drive value by leasing the remainder of the property. In accordance with its overarching strategy, the joint venture did not place debt on the property.

During the pandemic, investors have shown increasing interest in medical office product, viewing the asset class as a safe haven. According to a recent report from Hammond Hanlon Camp, medical office pricing has remained stable through the recession, and the stability has helped to attract both private and institutional investors to the asset class.

Healthcare systems are the most active sellers of medical office product, largely under a sale-leaseback strategy. According to the American Hospital Association, pandemic losses are expected to total $323.1 billion in 2020 for healthcare systems. Due to the pandemic, these providers have needed to recapitalize.

Healthcare Realty Trust’s strategy under this partnership supports the surge of investor activity and the stability of medical office. The REIT says that the new joint venture will help it sustain higher investment volume and earnings growth by further diversifying its funding sources, despite any market volatility. Healthcare Realty Trust will also manage day-to-day operations and leasing of the properties in the joint venture. It already owns a major foothold in the asset class. The firm already owns 211 outpatient healthcare services-related real estate assets in 24 states. The portfolio totals 15.5 million square feet and is valued at approximately $5.5 billion.

In the third quarter, the firm completed the largest medical office real estate transaction with the sale of a 200,000 square-foot comprehensive outpatient care facility in Oklahoma City, OK, occupied by Mercy St. Louis. As a result, Mercy Health was the largest buyer of medical office in the third quarter.