Why investors are paying millions for medical office buildings

Alia Paavola - Print  | 

A Chicago-based real estate investment firm recently bought a Houston medical office building for more than $400 million — the largest price paid in the nation's history for a medical facility and the latest sign these properties are in high demand, The Wall Street Journal reports.

The Memorial Hermann Medical Plaza, purchased by LaSalle Investment Management's property fund for a record $405 million, is a 28-story, 500,000-square-foot building that is 99 percent occupied.

This deal reflects a trend: Real estate investors are gobbling up medical offices and other properties that serve an aging population.

"Competition among real estate investors for high quality medical office buildings is intense," property consultant firm CBRE wrote in a recent research report cited by WSJ.

Not every property in the healthcare industry will benefit as the population ages, especially as the industry faces headwinds because of changes to the ACA, new tax policies and the push to value-based care, analysts say. But one thing is certain — medical office buildings are considered the safest of all healthcare real estate.

Medical office buildings are top of mind for many real estate investors because they are less vulnerable to reimbursement and regulation changes, and they have predictable revenue streams. Tenants usually pay about $1 in rent for every $10 generated in revenue —so landlords have flexibility to increase rent, according to Richard Anderson, a managing director at Mizuho Americas Research, where he focuses his research on healthcare real estate.

Medical office buildings have several other perks. For one, these buildings typically have outpatient surgery centers, which are expected to benefit from the industry transition to value-based care. In addition, they are also more easily converted to other types of commercial property if patient demand changes or reimbursement changes make the office financially unsustainable.

"There's a sense of stability about the asset class that is appealing to a wide range of investors," Mr. Anderson told the WSJ.

The purchase of Memorial Hermann Medical Plaza beat out the previous record for a single medical office property, a deal worth $332.5 million.

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