Publisher’s Letter (January 2006)

Curios about cap rates

7 PERCENT TO 8 PERCENT SEEMS COMMON

Dear Reader:

As one of the few established sources of healthcare real estate information, we get many phone calls and e-mails from readers looking for industry data – especially late in the year during strategic planning time. We have never formally kept track, but I can say with absolute certainty that more than half of those inquiries are about the same topic: capitalization rates for medical office buildings (MOBs).

We believe that compiling comprehensive, accurate data on “typical” MOB cap rates is next to impossible because there are too many geographic markets, too many asset-specific variables and too many deals that are never disclosed. Some national brokers, especially Marcus & Millichap, do a pretty good job of it, and are kind enough to share their data with us. But even they freely admit that their figures are incomplete and shouldn’t be taken as Gospel.

However, in response to that insatiable hunger for MOB cap rate information, I wanted to share some interesting tidbits we gleaned from the third quarter 2005 earnings conference call held Dec. 1 by Healthcare Realty Trust (NYSE: HRT). Check out the following comments from David Emery, HRT’s chairman and CEO:

“We remain challenged by the prolonged environment of low cap rates that limited our medical office acquisition opportunity this year,” he said. “While we continue to see a sizable number of investments in the offerings in the market, most are offered by third parties attracting capital from pension funds and other non-traditional investors. Cap rates on these properties have been in the 7 percent to 8 percent range.”

That generally jibes with what Marcus & Millichap found this year, as well as what we’ve been hearing.

Of course, there are always exceptions, a startling example of which can be found in this month’s Company Profile of Granite Partners, which starts on Page 1. In that article, company executives say they are working on an MOB deal involving an off-shore investor that is willing to accept a cap rate of about 4 percent. Yes, 4 percent – although planned rent escalations should bring the return up to at least 7 percent.

Do with this information as you will. But, feel free to keep calling. We love to hear from you.

Murray W. Wolf, Publisher