Marcus & Millichap: Medical Offices Change

Millennials are driving an emerging medical office building trend: urgent and acute care centers and walk-in clinics are replacing primary care physicians and emergency rooms, reported Marcus & Millichap, Calabasas, Calif.

“Urgent and acute care centers, retail clinics (walk-in centers often located in pharmacies and grocery stores) and stand-alone emergency departments are replacing primary care physicians and hospital emergency rooms as this generation strives for more efficient and affordable healthcare options,” Marcus & Millichap’s Medical Office Report said.

Medical office design and building amenities are changing to reflect an evolving healthcare industry, M&M said. “Large healthcare providers are acquiring and expanding services off campus and closer to residential areas, providing patients easier access to care,” the report noted. “This has prompted the development of ambulatory surgery centers, stand-alone emergency rooms and large multi-tenant medical office buildings.”

And as the way people seek medical care changes, developers are changing their medical office offerings with flexible floorplates and amenities including lean design and green building features, M&M said.

Medical office building financing is changing as well. “Private capital is emerging as a major option in the $5 million to $20 million price tranche and could begin to take a larger share of transactions this year,” the report said. “A rise in crossover capital is also increasing competition for medical office properties as single-tenant retail investors target similar investment opportunities in this segment for higher yields. For-sale inventory is limited as medical office assets are in high demand with cap rates compressing over the past several years.”

Marcus & Millichap Capital Corp. Senior Vice President William Hughes said an increase in the 10-year U.S. Treasury yield following the presidential election is encouraging many borrowers to reassess pricing and potential returns. “Additional upward pressure on long-term rates could limit the extent of additional price increases and place upward pressure on cap rates,” he said.

Hughes said lenders will likely resist overextending leverage and will maintain debt coverage ratios at a minimum of 1.25X for both acquisitions and refinancings in the next few months.

“National banks are the most active lenders across the medical office segment, providing financing for both private parties and large institutions,” Hughes said, noting that leverage for medical office assets ranges up to 75 percent with interest rates hovering between 3.75 percent and 4.5 percent. “Community and regional banks are more flexible, providing creative financing options for local borrowers or familiar assets.”

Life insurance company financing remains a good option for investors less concerned about leverage and looking for flexible options and longer terms, Hughes said. “[But] commercial mortgage-backed securities originations in particular are lagging behind other capital sources because of rigid structures including borrowing entities, prepayment penalties and warm body carve-outs to name a few.”