COVER STORY, MARCH 2010

MOB MENTALITY
The medical office building sector continues to forge ahead at a healthy pace in uncertain economic times.

RCA'S MOB COMPARISON:

The West vs. The Rest

NHP Acquires MOB Portfolio for $211 million

Newport Beach, Calif. — Newport Beach-based Nationwide Health Properties (NHP) has acquired a majority interest in a five-property California medical office portfolio for $211 million. The seller is California limited liability company Pacific Medical Buildings and some of its affiliates.

For the first property, NHP acquired a 65 percent interest in a 140,000-square-foot facility located in Mission Viejo. It's joint venture partner in the property is Mission Hospital Regional Medical Center. NHP paid $67.3 million for the stake, including the assumption of $48.1 million in debt, $14.2 million in cash and $5 million in ownership units of the partnership.

NHP purchased a 69 percent interest in a 130,000-square-foot facility located in Orange from a physicians group associated with St. Joseph Hospital of Orange. The $62.3 million purchase price includes the assumption of $50.2 million in debt, $14.2 million in cash and $4 million in ownership units of the partnership.

In Pasadena, NHP purchased a 71 percent interest in a 190,000-square-foot facility through a joint venture with a Pacific Medical affiliate. As part of the deal, NHP provided a $56.5 million mortgage loan, of which $49.8 million has been funded; a $3 million mezzanine loan; and $13.5 million in cash. NHP also has an agreement in place under which it may acquire the remaining interest in the joint venture if certain conditions are met.

Finally, NHP purchased the remaining 55 percent interest in an affiliate of Pacific Medical that owns two medical office buildings in San Bernardino totaling 130,000 square feet. The company paid $2.6 million in cash and assumed $6.2 million in debt.

All five properties will be managed by PMB Real Estate Services, which is a 50/50 joint venture between NHP and Pacific Medical.

— Coleman Wood

PHOENIX MOB SECTOR RISNG

Morris

Commercial real estate companies and investors are viewing the greater Phoenix medical office building market as a growth area, as healthcare delivery models change and evolve nationwide.

Demand for physicians’ services is so high in Phoenix that patients can find it difficult to make timely appointments. Although the population is relatively youthful, the city’s sunny climate is also a magnet for retirees — high consumers of healthcare.

• New models of medical treatment

In an attempt to hold down the soaring costs of medical care by reducing overnight stays, more and more patients are receiving treatment, including minor surgeries, in medical offices and surgery centers, and fewer patients are hospitalized nationwide. Although fewer doctors are launching solo practices in new space in the Phoenix metro area, small physician groups are forming practice coalitions, joining larger practice groups and leasing shared medical suites.

Investor groups are still interested in outpatient surgery centers even though some have gone out of business due to capital constraints and a decrease in elective surgeries. Ambulatory centers and mini-hospitals are more desirable to build, because profits go to physicians and other investors, rather than to hospitals. They are less expensive as well, with the cost of new hospital construction at more than $1 million per bed.

• More MOBs will be needed

The result, industry professionals predict, will inevitably be demand for more medical office buildings (MOBs). The medical office market in Phoenix today totals nearly 14.1 million square feet, representing approximately 14 percent of the total office market of almost 100.3 million square feet. Currently, the only new construction in Phoenix is a surgery center development although a few medical office buildings are rumored to be starting in the East Valley.

A fundamental shift in the medical office market may occur in Phoenix and nationwide with the passage of a national healthcare reform bill. Although passage is uncertain at present, a major reform bill could bring as many as 30 million new patients into the country’s healthcare system. More patients require more space, as much as 1.9 square feet for each patient, prompting a “burst of fresh medical office and other health-care property deals,” according to CoStar’s Randyl Drummer in mid-February. A huge increase in demand will drive new medical office construction, including MOB developments by hospitals or near their campuses.

• MOB sales vs. general office

National medical office sales volume dropped by 63 percent in 2009, as compared with a 72 percent drop for the entire office sector, according to statistics from Real Capital Analytics’ “U.S. Capital Trends”. REITs represented the largest medical office buyer group, while 46 percent of sellers were users. As further evidence of investor interest in medical office buildings, average cap rates rose more moderately for medical offices compared with office properties as a whole.

With this trend, Phoenix medical office transactions in fourth quarter 2009 were concentrated in the Northwest and Southeast areas of the Valley of the Sun. Dominating medical office sales was a single $107 million sale/leaseback of a property comprising 17 buildings; it was acquired by the REIT Healthcare Trust of America from Sun Health (now a part of Banner Health) and originally built by Sun Health for its own use.

• A More Stable Investment

While the cost of medical office space in Phoenix has declined somewhat, it has held steadier than general office space. Asking rates for full-service range from $16 to $33 per square foot, with landlord concessions reaching as high as 1 month free rent for every year of the lease. Medical tenants have incentives to negotiate good, long-term deals because of the high expense of needed build-outs and because they tend to lose patients when they move. A further incentive is the high cost of building new space, at $55 to $70 per square foot.

Investors can be confident that, with or without national healthcare reform, there will be a growing need for more physicians and facilities for delivering new models of healthcare. The medical office market will enjoy robust health in the foreseeable future.

Kate Morris is a senior vice president at Transwestern in Phoenix.

TOP 5 MOB TRENDS IN SOUTHERN CALIFORNIA

1. Demand remains strong for medical office space, especially well-located Class A medical buildings on the west side of Los Angeles, from Beverly Hills to the west. The medical office market has the highest occupancy rate at well in excess of 95 percent.
2. The rental rates in the medical office market have not gone down at all and remain firm unlike other sectors.

3. Landlords have not had to add anything to concession packages such as free rent or increased tenant improvements.

4. There continues to be a strong desire for medical office buildings that are located near hospitals. This is more convenient for both staff and patients and cuts down on travel time for the doctors between surgeries and procedures.

5. A need remains strong for more operating-room facilities as most of the hospitals are at maximum capacity already.

— Gary Weiss is a principal at Madison Partners in Los Angeles.

RCA on the West

Begun this month by Krause-Anderson Construction Co., the $17.8 million medical office project in Murrieta, Calif., will accommodate offices for more than 60 physicians.

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