Health-care properties are increasingly popular -- and an increasingly attractive niche

Jonathan Hipp, president and CEO, Calkain Companies Inc.

As published in Scotsman Guide's Commercial Edition, October 2009.

As demand for health care expands, opportunities to invest in medical-office properties have emerged. In fact, changes in U.S. demographics and the way Americans receive health care create a growing opportunity for commercial mortgage brokers and their investor clients. That opportunity is the niche of net-lease medical-office properties.

As the U.S. population gets older, U.S. residents are undergoing many age-related and cosmetic procedures. Chronic-disease and preventive care also are increasingly important. Costs for chronic-disease treatments now comprise more than 75 percent of national health expenditures, according to the Centers for Disease Control and Prevention.

In addition, while most medical procedures used to be performed in hospitals, they are now more often performed in outpatient-care clinics and physicians' offices. The American Hospital Association found that in 1981, for example, more than 90 percent of surgeries occurred in hospitals. By 2005, that was down to 47 percent of surgeries -- with 16 percent performed in physicians' offices and 37 percent in freestanding surgery centers.

These statistics, along with the medical-office sector's strong rental rates, long-term leases and stable occupancies, create an attractive option for commercial real estate investors. They also can be worthwhile to brokers and their lenders who can diversify their offerings and strengthen their portfolios.

Market examination

The medical-office sector has provided higher returns in the past decade than other commercial real estate sectors. In the first half of this year, 47 medical-office properties totaling $484.9 million changed hands, according to research firm Real Capital Analytics. The average price per square foot for medical-office sales in this period was $236, and the average cap rate was 7.8 percent.

These properties' price per square foot has increased from 2008's average of $222, and cap rates have increased about 40 basis points, according to Real Capital Analytics. This cap-rate increase is far less than other product types, which have seen cap-rate spreads jump by 200 to 250 basis points.

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