Smart money flocks to US medical real estate
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By Martin Freeman *
The most striking feature of the recent Building Owners and Managers Association (BOMA) international conference in Texas earlier this month was the exponential and dramatic interest in medical real estate (MRE) in the United States.
Martin Freeman
This conference brings together some of the key players in the MRE sector, particularly construction companies, property managers, buyers and sellers. It is one of two annual conferences in the US that offer insights into the industry. The other is the Revista Medical Real Estate Investment Forum, which will be attended by healthcare professionals, investors and property managers and will take place in March 2022.
Over the years I’ve been attending the BOMA conference, I’ve noticed the numbers go up, and since MRE is a niche sector, it’s a pretty big event now.
One of the reasons is that interest from larger private equity firms and REITs has increased due to the good performance of medical properties and their resilience to the COVID-19 pandemic.
Another reason for interest is that cap rates in the other two popular real estate niches in the US, commercial real estate and apartment buildings, have decreased – a reflection of rising prices – and thus yields have decreased. Investors are now looking for higher-yielding real estate stocks. Real estate also attracts investors who switch to stocks for fear of a correction and to diversify their portfolios following the recent liquidity-driven rally.
Medical Real Estate Trends in the United States
A number of key themes emerged from this conference.
First, there was a strong consensus that MRE prices will go up. This means that if you buy medical real estate now, there is a high probability that it will appreciate in value over the next 2-3 years, regardless of interest rate hikes or rising inflation.
For companies like OrbVest, dedicated to raising medical real estate for global investors, raising business off-market or through networks is more important than ever as real estate purchases become more competitive. We have been in this industry for almost eight years now and have forged valuable relationships. I spent a lot of time building the OrbVest brand in 2021 and the results are now clear: the industry likes our story and wants to do business with us.
If we are aiming for ten deals per year, we only need to close one deal per year with each of our partners that is achievable. New entrants will likely struggle to secure good assets, or they will tend to overpay for them.
Second, the conference showed that while builders are keen to get medical office buildings completed as quickly as possible, there are significant bottlenecks in the construction sector. After a standstill in 2020 during the height of the COVID-19 pandemic, construction companies are looking to catch up in 2020 and resume normal operations in 2021. Speakers at the conference raised concerns about rising prices for new buildings, making it difficult for developers to hit budgets and add value to existing buildings.
What is likely to happen now is that more expensive new builds will have to charge higher rents, which will also cause rents in older buildings to rise over time. We currently have long contract terms that vary between 2-3% escalation across the portfolio. We found that rent escalation for new rentals is higher in markets where construction has not yet kept pace with demand and landlords are exposed to inflationary pressures.
A third topic at the BOMA conference was that there are less speculative developments in this sector. Most MRE developers will not start construction until the building is at least 50% rented in advance, unlike residential apartments where there is still a lot of speculative construction going on.
Once an “orphan” in the US real estate market, MRE has never been this strong.
How will OrbVest respond to these trends?
All of this means that OrbVest has to react faster than before when business is pending. We have already established that our relationship partners need a quick “yes” or “no” to a deal and we need to be able to close a deal on time.
It also makes sense to expand OrbVest’s pipeline quickly in the wake of this wave. We still see a lot of opportunities and as a small player we can act quickly. We are able to buy buildings that are too small to interest the bigger players, put them together in a portfolio, and then (after we’ve done the hard work) sell that portfolio to a bigger player.
OrbVest’s commitment to its investors is to create long-term and sustainable wealth creation, expecting to deliver 7-8% cash on cash dividends annually and double-digit US dollar returns. While we are not speculative investors, this does not prevent us from selling before the usual five-year maturity if there is a sufficiently attractive offer.
For example, we are currently negotiating two buildings that we may sell earlier than expected. On a building, instead of an overall IRR of 12-13%, investors could realize 15-17% in dollars. On the other hand, the total IRR could be more than 20%. We are confident of closing these deals as there is more than one potential buyer.
As we pay off some investments, we will make sure we are able to offer new opportunities. We will maintain our policy of only considering acquisitions that meet our investment committee criteria and offer attractive fundamentals.
Medical real estate in the US continues to be a great long-term investment
Businesses change, strategies change, but we strongly believe in the healthcare niche and as long as it continues to generate returns for our investors, we will stick with it. We believe we can continue to find deals for the time being, build on our reputation, and build a $ 1 billion portfolio, perhaps faster than originally expected.
- Martin Freeman is the CEO of OrbVest
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