MOB prices cooled in Q1

BUT WHETHER THAT’S A TREND REMAINS TO BE SEEN

By John Mugford

 

For the first time in more than three years, it looks like the average price per square foot (PSF) for medical office building (MOB) sales has dropped a bit.

You read that correctly.

For the past several years, MOBs have become an increasingly attractive asset class, coveted not only by healthcare real estate firms and health systems but by institutional investors, real estate investment trusts (REITs), private equity firms and other large buyers. As a result, average price per square foot has risen and weighted average capitalization rates (projected returns, typically for the first year) have dropped steadily and dramatically.

According to the latest data from New York-based Real Capital Analytics Inc., the 12-month average price per foot of MOB sales dropped to $222 through the end of the first quarter (Q1) of 2007. That’s a 6.7 percent drop from the 12-month, rolling average PSF reported at the end of the previous quarter, Q4 2006. The average PSF reported in Q4 was $238.

The 12-month average PSF for MOB sales had been on a steady rise since Q4 2003, when it was just below $125, and cap rates have been on a steady decline during the same period – from 9.5 percent in 2003 to 7 percent or less in 2006.

That’s according to Real Capital Analytics Inc., a national research and consulting firm with offices in New York and San Jose, Calif. The firm bases its data on independent reports of transactions involving properties and portfolios of $5 million and greater.

By the start of 2005, the national average PSF was just under $175, and by the start of 2006 the 12-month rolling average had climbed to just over $200, according to Real Capital’s statistics.

Real Capital also breaks down its statistics by region. For the rolling, 12-month average ending with Q1, the Northeast portion of the country had the highest PSF for MOB sales at $350. The West had an average PSF of $242 while the Mid-Atlantic region’s average PSF was $241. Bargains abound in the Midwest, where the 12-month PSF was $152. The average PSF in the Southwest was $196 and in the Southeast it was $165.

Cap rate leveling

While the PSF dropped in the most recent quarter, the average MOB capitalization rate continued to decline – an indication that the asset class remains in strong demand by investors. Even so, the average cap rate looks to be leveling off – as experts have predicted they eventually would.

Real Capital’s Q1 2007 stats show a 12-month, average weighted cap rate of 6.9 percent for MOB sales, down from a 7 cap in Q4 2006 and a 7.1 cap in Q2 2006.

Real Capital also breaks down average cap rates by transaction size. For example, the Q1, 12-month average weighted cap rate for sales of more than $50 million was 6 percent, while the average cap rate for sales of between $15 million and $50 million was 6.5 percent. For sales of between $5 million and $15 million, the average cap rate was 7.4 percent.

Some of the deals

Real Capital’s quarterly statistics also list some select, recent transactions from throughout the country. During Q1, the country’s largest MOB sale recorded by Real Capital was the sale of the 520,000 square foot Las Vegas Medical Office Portfolio for $50.5 million ($97 PSF). The buyer and seller were not listed.

Another big sale was the 115,000 square foot 2440 M Street in Washington, D.C. The sale price was $50 million ($435 PSF) and the buyer was Rockville, Md.-based Washington Real Estate Investment Trust (NYSE: WRE).

Other large MOB sales included the 217,000 square foot 5599 N. Dixie Highway building in Oakland Park, Fla., for $39 million ($179 PSF); the 154,000 square foot North Scottsdale Medical Center in Scottsdale, Ariz., for $32 million ($208 PSF); and the 81,600 square foot Edwards Professional Plaza in Phoenix for $23.7 million ($290 PSF). q

The data cited in this article is used with the permission of Real Capital Analytics, under a special arrangement with Healthcare Real Estate Insights^™. For more current deals, cap rates and property details, please visit www.rcanalytics.com.