Medical Net Lease Makes Its Bones with Investors
Previously trading at a discount to overall net lease, it’s swung into a premium.
Single-tenant medical net lease is looking very healthy. Cap rates for the subsector, involving properties from $2 million to $8 million, dropped 55 basis points year over year to 5.95% in Q3 of 2021, according to a new report from the Boulder Group. The overall net lease group also saw a cap rate compression, but of 23 basis points.
In other words, a year ago, medical net lease was trading at a 28-basis point discount to the general category. Now it’s at a 4-basis point premium. “It’s outperformed the market by 32 basis points last year, which is fairly significant,” Boulder Group president Randy Blankstein tells GlobeSt.com. “A lot of net lease-investors are over allocated in retail. They want to rebalance, and that’s buy more in medical and in industrial.”
But industrial is wickedly popular these days, with cap rates in some geographic areas and types pushed down into the threes. The properties can be extremely expensive, especially when talking of major logistics space for an Amazon or Target or FedEx.
The boost was a shot in the arm from a general pandemic kick in the pants. “Clearly a beneficiary from Covid,” Blankstein says. “And an aging demographic, so a lot of need for the product.
Another impact of the pandemic was a swift increase in demographic shift from major urban centers to the sun belt, with secondary and tertiary metro areas seeing fast influxes. People need housing, office space, retail, and medical treatment.
Then, there are the shifts in practice and operations of the medical industry. Younger doctors graduating from medical school have an increasingly hard time operating independently. Many find work as employees, either in a hospital satellite office, a larger physician’s practice, or an urgent care facility. “You still see a lot of doctor groups getting larger and larger, for better or worse,” says Blankstein.
“Now with inflation worries on everyone’s mind, medical has greater escalations than most of retail does,” Blankstein adds. “It’s something you can buy in an inflationary environment, and it will retain some of its value. What is driving the $2 million to $8 million category, there’s a base that wants to diversify out of retail. Medical looks like a relative bargain in that respect [compared to industrial].”
Blankstein expects this category of medical net lease to continue its growth trend through at least 2022, with “every category of medical” growing.