Acquisition Yields Rise for Single-Tenant Medical Assets

According to a third-quarter report by The Boulder Group, the cap rate for the niche category increased by 22 basis points year-over-year.

In the third quarter of 2018, single-tenant net lease medical properties recorded a 22-basis-point year-over-year increase in cap rates, according to The Boulder Group’s latest Medical Sector Net Lease Report.

The cap rate for single-tenant net lease medical properties priced below $10 million went from 6.25 percent in the third quarter of 2017 to 6.47 in the third quarter of 2018. The source of the increase is the rise of for-sale properties fitting a certain profile.

“Investors continue to demand new construction medical assets as a primary acquisition target, which leads sellers of lower quality assets to add supply to the market,” Jimmy Goodman, partner with The Boulder Group, told Commercial Property Executive. “Lower quality assets are considered shorter term leased properties, [properties with] tenants with a lack of credit and properties located in secondary markets.” Non-investment grade tenants accounted for 75 percent of the net lease medical sector in the third quarter, per the report.

Playing favorites

Elaborating on the tenant factor, Goodman added, “Investment grade medical tenants and tenants affiliated with major hospital brands continue to garner the lowest cap rates.” And within that group, dialysis-related assets, which comprise more than 55 percent to the net lease medical sector, feature the lowest numbers; these properties recorded a 6 percent cap rate in the third quarter, compared to urgent care properties’ 7.3 percent cap rate.

More specifically, he continued, “New construction dialysis centers tenanted by Fresenius and DaVita set the bar for the lower end for cap rates within the medical net lease sector.” The top transactions of the third quarter included the sale of a DaVita dialysis center in the Los Angeles suburb of Glendale, Calif., for approximately $5.1 million, or $674 per square foot. In Corpus Christi, Texas, properties leased to DaVita and Fresenius sold for $618 and $428 per square foot, respectively.

Positive prognosis

The outlook for the single-tenant net lease medical sector remains positive. Not even the topic of health-care reform, which was so prominent just two years ago, is expected to have an impact on the sector’s desirability.  “Health-care reform has not been a focal point when investors are evaluating net lease medical assets. Investors believe in the long-term viability of medical tenants due to the continuing aging population,” Goodman said. “Medical assets also tend to have a built-in repeat client base once the tenant establishes themselves in a new location.” And the sector’s resistance to e-commerce will also continue to spur investor activity.

Image courtesy of The Boulder Group