Boulder Group: Single-Tenant Net Lease Medical Sector Healthy

The single-tenant net lease medical sector will likely remain active because investors like the long-term outlook for healthcare-related properties, said Boulder Group, Northbrook, Ill.

“The net lease medical sector continues to attract investor interest due to the increasing aging population of the country and the sector’s resistance to e-commerce,” Boulder Group Vice President John Feeney said, calling net lease medical properties viable alternatives to net lease retail investments, especially for private and 1031 buyers seeking lower acquisition prices. Private and 1031 investors have purchased two-thirds of the net lease medical properties sold so far this year.

The net lease medical sector priced at a five basis point discount to the overall net lease market in the third quarter, Boulder reported. “This can primarily be attributed to the high concentration of non-investment-grade rated tenants within the sector,” Feeney said, noting non-investment-grade tenants made up nearly 70 percent of total supply in the third quarter.

Investment-grade net lease medical properties traded for $2.83 million on average nationwide, which equals $386 per square foot, Boulder said. Non-investment-grade assets sold for $2.65 million on average or $318 per square foot.

“Investors across all profile types will continue to acquire net lease medical properties as cap rates remain attractive when compared to the overall net lease sector,” Feeney said. Single-tenant net lease medical sector cap rates compressed by 25 basis points year-over-year to 6.25 percent in September. “Additionally, many net lease medical properties have rental escalations in their leases providing investors with an inflationary hedge,” he said.

The dialysis sub-sector, which includes tenants Fresenius and DaVita, experienced the most cap rate compression in the third quarter–28 basis points–and had the lowest cap rates in the net lease medical sector at 6.1 percent. “This is attributable to the long-term leases with rental escalations that these two tenants frequently exhibit,” Feeney said. Net lease dialysis properties make up more than 45 percent of the overall net lease medical supply.