Average MOB cap rate drops to sub-7
EVEN THOUGH STAT IS PRELIMINARY, IT INDICATES THAT DEMAND REMAINS STRONG
By John Mugford
As is usually the case, it might be too early to draw final conclusions from recently compiled statistics of nationwide medical office building (MOB) sales from the first quarter of 2006 (Q1).
But one startling statistic jumps from the page: The average cap rate of the 94 sales transactions recorded so far in Q1 was 6.54 percent. That represents, perhaps, a new low point since average MOB cap rates began a slow decline from 11.1 percent back in 1994.
The actual average cap rate for Q1 is expected to be more than 6.54 percent, however, as more transactions are expected to trickle in, according to Yitzie Sommer, senior research manager in the New York office of national brokerage firm Marcus & Millichap. The firm compiles nationwide MOB sales data each quarter and shares the information with Healthcare Real Estate Insights™.
Mr. Sommer says he believes the average cap rate for Q1 will likely end up being closer to, or perhaps above, 7 percent. The final average cap rate for Q4 2005 was 7.68 percent.
In recent quarters, Mr. Sommer and John R. Smelter, senior director of the healthcare real estate group in Marcus & Millichap’s San Diego office, have predicted that MOB cap rates could eventually stabilize, even perhaps starting a slow rise. Predicting when that will happen, however, is not easy, Messrs. Sommer and Smelter say, even though interest rates are rising, which typically leads to higher cap rates for MOBs.
“We’re actually seeing cap rates continue to go down in the strong markets, while they’re stabilizing in other markets, which is in line with the general office markets,” Mr. Sommer says.
Another tell-tale statistic from Q1 shows that the average sale price per square foot for MOBs rose to $209. That represents about an 11 percent increase from Q4 2005. In March, Healthcare Real Estate Insights™ reported that the average PSF for MOBs in Q4 was $200. Those results, however, were preliminary, and the final, edited average PSF came in at $188, according to Marcus & Millichap.
“We think the growth of prices will slow a bit in the fourth quarter, and we’ll probably see an overall increase of about 5 to 7 percent total for the rest of the year,” Mr Sommer says.
Other statistics from Q1 2006 are as follows:
- § 94 transactions, a 6 percent decrease from the 100 recorded in Q4. Mr. Sommer predicts that the final number of transactions will be around 100 or higher
- § $790 million in total sales volume, an increase of about 4 percent from Q4, and a whopping increase of 35 percent from a year ago
The reason for the sinking cap rates and rising PSF, of course, is high demand for MOBs from a whole host of buyers and investors. Where MOBs were once considered niche acquisitions, the properties have in recent years caught the eye of large institutional investors, such as pension funds, real estate investment trusts (REITs), high net-worth individuals, and a host of others. Such investors continue to pursue acquisitions of a shrinking pool of available MOBs, sources agree.
Mr. Sommer adds that several noteworthy transactions there expected to close in Q1 were pushed off until Q2.
“In most cases, there was nothing wrong with the sellers or buyers, it’s just that the deals included loan assumptions that were pushed back a bit,” he says.
One deal that has been pushed back involves the portfolio sale of four MOBs in the Washington, D.C., suburb of Rockville, Md. There, Marcus & Millichap has been working on the sale of the MOBs, which are located close to Shady Grove Adventist Hospital and total 140,000 square feet. The buildings are 100 percent occupied and the final sale would be at a cap rate of 5.9 percent.
While the sale of all four buildings was expected to close in the first quarter, only two have closed so far, Mr. Sommer says. The others will close in coming weeks. q
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