Transactions: Q2 MOB stats (October 2007)

MOBs are still the deal

SALES VOLUME STRONG; PRICES LEVELING OFF

By John Mugford

While the commercial real estate liquidity crunch might be having a temporary effect on some healthcare real estate transactions, nationwide sales of medical office buildings (MOBs) show no signs of slowing.

As of Oct. 1, in fact, the number of MOB sales was on a record pace in 2007, according to statistics provided by New York-based Real Capital Analytics Inc. (RCA). The company, which tracks nationwide commercial property transactions and compiles statistics, provides quarterly data concerning MOBs sales to Healthcare Real Estate Insights^™.

According to RCA’s most recent sales data, there were 276 MOB transactions as of Oct. 1. Without going out on a limb, the prediction here at HREI^™ is that the number of transactions in 2007 will exceed the total in 2006, when there were 277 MOB sales. (For this prediction to come true there needs to be just two more sales in the final three months of 2007 – a good bet, to say the least.)

“Interest remains high in medical office because of the nation’s demographics, which is always the biggest driver when it comes to commercial real estate transactions,” says Dan Fasulo, managing director with RCA. “And the demographics, namely the aging of the population, are not going to change anytime soon.”

For 2007, however, MOB prices have leveled off, even dropped a bit, while the average capitalization rate has also leveled off – falling just a hair from last year.

RCA’s statistics indicate that the average price per square foot (PSF) for the 276 transactions recorded so far in 2007 was $215. That compares to a nationwide PSF of $225 for all of 2006.

The average cap rate in 2006 was 7.1 percent, while the average cap rate so far in 2007 is 7 percent.

While the cap rate has indeed continued to drop in 2007, the fall is much less substantial than in previous years. RCA’s stats show that the average cap rate in 2001 was 9.9 percent. By 2005, it had made a steady drop to 7.3 percent. (The cap rate is a measure of a property’s demand, as it is comparison of an asset’s annual net operating income and the sale price; the lower the cap rate the higher the demand.)

“While the average price per square foot can often come down to the actual assets that were sold – in any given period of time there can be higher-priced assets that sell, which can skew the results – it does make sense that prices are leveling off with what’s going on in the debt markets right now,” says Dan Fasulo, managing director with RCA. “If buyers have to pay more for debt, as they currently are, they’re not going to be willing to pay as much for an asset.”

Even with the recent upheaval in the commercial mortgage industry, Mr. Fasulo notes that “deals that make sense are still going to get done. If the markets weren’t working, deals wouldn’t be getting done. But deals are taking place.”

Market vs. market

RCA’s 2007 second quarter statistics (Q2) break down the statistics for MOB sales by geographic region. As is typically the case, prices remain higher and cap rates are lower on the coasts.

For example, by the end of Q2 the 12-month running average price per foot in the Northeast was a whopping $369, with an average cap rate of 7.5 percent. Mr. Fasulo notes that prices by region can appear to be out of whack because certain transactions can weigh heavily on the overall results.

Even so, the region with the next highest 12-month average PSF was the Mid-Atlantic, at $255 and an average cap rate of 6.8 percent.

On the West Coast, the average PSF over the last 12 months was $241 with an average cap rate of 6.7 percent. Other regions are as follows: Southeast: $184 PSF and cap rate of 6.8 percent; Southwest: $203 PSF and cap rate of 7.1 percent; and the Midwest: $167 PSF with a cap rate of 7.8 percent.

RCA’s stats also show the composition of the buyers and sellers of MOBs. For the 12 months ending with Q2, the most prevalent buyers of MOBs were private in-state entities at 26 percent; institutional investors at 16 percent; private out-of-state entities at 15 percent; and real estate investment trusts (REITs) or other publicly held entities at 14 percent.

The statistics also show the metropolitan areas with the highest sales volume (total price paid). Boston topped the list for the 12 months ending with Q2 at total sales volume of an estimated $610 million, an average PSF of $495 and an average cap rate of 6.6 percent

Other markets with high sales volumes included Seattle with $330 million in MOB sales during the previous 12 months, an average PSF of $274 (no cap rate listed); Phoenix at $270 million with a PSF of $235 and an average cap rate of 6.6 percent ; San Diego at $230 million with a PSF of $221 and cap rate of 6.8 percent; and Los Angeles at $220 million with PSF of $327 and cap rate of 6.2 percent.

While certain sales might skew PSF statistics, Mr. Fasulo notes that the prices are higher in certain regions because of a variety of factors. For example, prices are high in the Northeast because MOBs are in high demand yet there is a lack of developable land for new construction. The result is a PSF of $369.

Conversely, while demand is high in a place such as Las Vegas, there is plenty of land available. The result, in part, is a PSF of $176.

“There are such different circumstances in the various markets,” Mr. Fasulo says. “Sellers have much more power in commanding higher prices on the coasts.” q

Data provided by Real Capital Analytics, based on independent reports of properties and portfolios $5 million and greater. For more current deals, cap rates and property details, please visit www.rcanalytics.com.