Publisher’s Letter (September 2006)

The alternative to ‘alternative’

INSTITUTIONS CONSIDER MEDICAL REAL ESTATE ‘CORE-PLUS’

Dear Reader:

It wasn’t long ago that medical office buildings (MOBs) and other healthcare real estate assets were viewed as a quirky little corner of the commercial real estate market. But, as we have seen since the launch of this newsletter in January 2003, MOBs seem to generate greater investor interest every year.

So it was interesting for me to get an outside perspective on MOBs during the Sept. 11 and 12 “High-Performance Real Estate Investment Summit” in Las Vegas. The event was sponsored by Financial Research Associates Inc., and I was invited to be on one of the panels.

The event was originally dubbed the “Alternative Real Estate Investment Summit.” But that was abruptly changed a few weeks before the event. I suspect that the word “alternative” was scaring off potential attendees, and I speculate that the organizers changed the name to emphasize the potential returns, downplay the risks and boost attendance.

The alternative – er, high-performance – real estate asset that my panel discussed was, of course, medical real estate. I was joined by two Healthcare Real Estate Insights^™ Editorial Advisory Board members, Bob Rosenthal of Pacific Medical Buildings and Jim Moloney of Cain Brothers, as well as Jeff Land of Catholic Healthcare West. There was also a session on senior housing and healthcare. (Highlights from those presentations will be published in next month’s edition.)

But what I found even more intriguing were the other niches discussed. Part of the focus was on foreign investment – always a fascinating subject. Exotic locales including China, India and Brazil were spotlighted. Another hot topic, tenant-in-common (TIC) investment, was also on the agenda.

What I found most interesting, however, were the decidedly less sexy product types that were discussed: infrastructure, self-storage, student housing and the redevelopment of brownfields.

The presentation on self-storage by John Nikolich of Flint Creek Partners, an Illinois-based investment bank, contained an added bonus: one page of a PowerPoint presentation that showed how institutional investors categorize “core assets,” “core-plus assets” and “non-core assets.”

As you might expect, the slide identified core assets as the four traditional real estate asset classes – “the four main food groups,” as several presenters called them – office, industrial, retail and multifamily. Core-plus assets included home builders, manufactured housing, self-storage, triple-net leased properties and, yes, medical office. Non-core assets included golf courses, hotels, life sciences, parking, timeshares and healthcare, by which I think he was referring to senior living facilities.

In short, we’re long past the day when MOBs were a non-core asset class. Institutions have recognized the investment potential – as evidenced by declining cap rates. But there are financing and liquidity advantages to achieving core-plus status, and the average cap rates for MOBs are still a basis point or two better than most core assets.

High-performance? You bet.

Murray W. Wolf, Publisher