MOBS VERSUS MICRO-HOSPITALS
This is not to say that traditional categories will languish by the
wayside in 2019. Investors will continue to find opportunity in the
industrial and multifamily categories for the reasons stated above.
Even certain segments of the woebegone retail sector will attract
So, too, will that most plain vanilla of asset classes: medical office.
After examining the third quarter earnings statements of the
big three healthcare REITs—Ventas, HCP and Welltower—
Mizuho REITs analyst Richard Anderson came to the conclusion
that these companies were signaling an intent to increase their
footprint in this category.
HCP took pains to emphasize its joint venture with Morgan
Stanley that’s aimed at investing in medical office, as well as a new
partnership with HCA. Meanwhile, Welltower is expected to close
about $500 million of MOB transactions in the short term. The
firm, Anderson relates, “has always talked about using its senior
housing portfolio as a quasi-hanging carrot for medical office,” in
terms of acting as a sort of medical office.
As for Ventas, it’s reigniting its exclusivity arrangement with
PMB Real Estate Services. The healthcare REIT, which inherited
the medical office developer when it merged with Nationwide
Health Properties many years ago, reupped its agreement with
PMB for another decade.
To many bystanders, the renewed focus on medical office space
may seem odd, if not contrarian. For one, cap rates on the medical
office assets that are trading hands are still quite low. Then there is
its reputation as a relatively lackluster, albeit stable, sector in terms
of growth, particularly when compared with the high-risk/ high-return potential of skilled nursing.
Anderson’s tentative takeaway: a return to a risk-off mentality
may be around the corner for healthcare REITs. “Maybe REITs
are becoming buyers of medical offices simply because of their
low risk orientation, even though the asset class remains quite
expensive,” he asserts.
There’s another variation of healthcare real estate to consider:
the micro-hospital. Already boasting its own set of adherents, this
newer category is also expected to perform well in 2019. Generally
comprised of inpatient facilities with a handful of short-stay beds,
micro-hospitals offer a few of the same services as their larger
counterparts, such as emergency services, imaging, pharmacy, lab
work and, in some cases, outpatient surgeries and primary care.
What’s making them particularly attractive, though, is the fact
that they’re typically less expensive to operate. “We have seen a
number of health systems head more toward a hub-and-spoke
model with regard to their facilities,” says Jim Koman, managing
principal and founder of Elm Tree Funds.
As this is happening, micro-hospitals are critical for hospital
systems to be able to designate the surrounding free-standing
emergency rooms as hospital outpatient department facilities—
also known as HOPDs, he adds. The HOPD facilities are branded
under the same health system as the micro-hospital, and are
slightly smaller in terms of size and scope of services provided.
One significant advantage of HOPDs is that they can accept
Medicare and Medicaid, which “significantly improves a facility’s
brand image to commercial payors in the surrounding market due
to the affiliation with a large health system,” Koman points out.
These facilities also allow health systems to expand their geographic footprint into areas not well served by larger hospitals,
thereby increasing their patient base.
For all these reasons, he predicts that investment—particularly
from net lease investors—in micro-hospitals will be increasing
along with the broader medical office building sector. “Cap rate
compression has really come into play for these assets,” Koman
says, precisely because most are backed by an A-rated healthcare
system. They also tend to have 20-year leases with strong annual
increases in the rent. “They are becoming very sticky assets.”
CLUSTERS COME TO SECONDARY MARKETS
At the beginning of November, the Riverhead Town Board of
Calverton, NY, voted to approve the sale of a 1,643-acre undevel-oped parcel in eastern Suffolk County to Calverton Aviation &
Technology. Located in an Opportunity Zone, the acreage
included the former Naval Weapons Industrial Reserve Plant at
Calverton. Over the next decade, CAT intends to tap several billions of dollars’ worth of private investment to transform the site
into a hub for aerospace technology, innovation and high-tech
In other words, it is hoping to develop a new aerospace cluster.
Such clusters are common in the biotech and life sciences industries. Alexandria Real Estate Equities, for example, has turned creating these hubs into an art form. Now real estate futurists say this
model will expand into other fields and secondary markets, a trend
that will start to become apparent in 2019.
“There’s been a movement toward the diversification of indus-
tries from the primary markets of Boston and San Francisco,”
says Anne Kinsella Thompson, a visiting lecturer at MIT and
author of “Commercial Real Estate at the Crossroads,” a report
commissioned by Capital One from MIT’s Center for Real Estate.
“Places like Cleveland, Denver, Milwaukee and Indianapolis are
competing to draw industries into their markets.” Some of the
companies they lure are refugees from the Bay Area and its high
costs, she says, but startups are also choosing to move to, or form
in, those locations. “There is a lot of movement.”
Thompson points to a number of cities to illustrate her point.
Syracuse is home to a burgeoning business in drone testing and
innovation. Central Indiana is seeing growth in agriculture, bio-
tech and life sciences, similar to what Boston has built up over
the years. And the strong presence of the US Navy is supporting
San Diego’s strong cybersecurity hub. These clusters are not
being created in a vacuum, Thompson says. Local governments
and businesses, including real estate developers, are actively
Sporting goods retailer Nike is testing its Nike Live concept on Melrose
Avenue in Los Angeles. The store has a pop-up vibe and will operate like
an experimental digital-meets-physical retail environment. PHOTO: Nike