Finding the right niche matters in commercial real estate. And Terravet Real Estate Solutions has found one: The Bala Cynwyd, Pennsylvania-based firm buys, leases and expands existing veterinary properties across the country, including several in the Midwest.
After buying these properties, Terravet often enhances these facilities, turning them into the modern medical offices that today’s pet owners expect. Terravet might also help veterinarians find new locations as their practices expand.
This might seem like a small niche. But Dan Eisenstadt, founder and chief executive officer of Terravet, said that it’s a growing one. People spend a lot on their pets, and they’re not shy about taking them to the veterinarian when they need medical attention.
We spoke with Eisenstadt about his commercial niche, why his company focuses on veterinary practices and why working this commercial real estate property type is becoming so lucrative.
I’ll start with the obvious question: Why focus on veterinarian’s offices?
Dan Eisenstadt: I was in a private equity role for about 12 or 13 years. A couple of partners and I were thinking of going off on our own. The first thing we did was focus on investing not in real estate but in the operating of businesses, the actual practices. This was pre-2009. The economy had turned bad. We tried to figure out where we could be most productive. We wanted to find something that wasn’t outsourceable to China. What about veterinary practices? We got excited about that.
I eventually co-founded a business that was an operator of veterinary practices. It grew to about 45 practices before I sold it. The second practice we bought was run by a husband-and-wife team. They owned the real estate and we bought the majority of the practice. One day, we got a call from the husband. Their kids were going to college, so they were interested in selling the real estate to help pay for that. He wanted to know if I had any interest. We negotiated and we ended up buying that real estate. That’s when the light bulb went off.
What inspired you to make the leap into buying the actual real estate instead of just operating the practices?
Eisenstadt: There were a lot of institutional investors buying and backing the practices. But no one was buying the real estate. There seemed to be an opportunity for institutional players to get into owning this kind of real estate.
These are unique facilities. They require a significant amount of buildout. It’s better if they are free-standing instead of in-line. They have unique HVAC needs. At the same time, there is significant growth in this sector. The number of vets and the number of visits to vets is increasing. What had been developed in this space over many years wasn’t going to be suitable for the future. More and more institutional investors are entering the operations side of these practices. They are going to want more sophisticated facilities. We thought this could be a good move, to become the first mover in veterinary real estate.
No one was really thinking of this as an asset class. We raised a small friends-and-family fund and bought seven or eight buildings. We found other vets who might want to sell. We raised an $80 million equity fund about five years ago, and we’ve steadily grown since then.
Dan Eisenstadt, founder and chief executive officer of Terravet Real Estate Solutions
How many veterinary facilities do you own now?
Eisenstadt: We own about 200. We are coming up on a million-and-a-half square feet of real estate in this sector in 39 states.
We own two types of veterinary real estate. One is general practice real estate, where you have three or four vets in a single building. They are typically open from 7 a.m. to 8 p.m. in retail locations. You need to have good parking and be close to bedroom communities for these facilities. They are typically 4,000 to 7,000 square feet.
The second type we own are emergency, 24/7 hospitals. These are more often located in commercial office or flex industrial areas because you only go there if there is an emergency or they are referred. That real estate is bigger, about 10,000 to 40,000 square feet.
Why is the number of veterinary practices and office space growing so fast?
Eisenstadt: The pet population has grown. During COVID, a lot of people got that COVID puppy. Then there’s the theory that as more Americans are home with their pets, they bring them in to the vet more often. They will notice different things. Whether that theory is true or not, we don’t know. We don’t have hard data on that.
Another thing, though, is that the human-animal bond is increasing. That is driving all sorts of innovations in veterinary medicine and ancillary products. There are new pharmaceutical innovations. There is new diagnostic testing. This combination of additional diagnostics and pharmaceutical solutions, along with the strengthening of the human-animal bond, has all combined to boost veterinary visits. People treat their pets more like their kids in terms of how they think about healthcare. That trend of more innovation and more medical interventions being available is helping to drive the growth of veterinary facilities.
When you purchase a veterinary office, do you often have to modernize the facility?
Eisenstadt: We have renovation and expansion projects going on in about 20% of our properties. This runs the gamut from renovating the front office to adding an exam room. Other times, the practices are growing and the veterinarians need to find a new building. In this case, we often identify a building, buy it and the veterinarians move in.
That is happening quite a lot. For example, we are turning an old furniture store into a specialty emergency hospital that will cover about 25,000 square feet. Another project involves turning a former micro-brewery into a specialty hospital.
It runs the gamut. There are quite a few buildings that we acquire that are in great shape. We do stay away from converted houses. About 30 or 40 years ago, there were a lot of homey practices like that. That has changed as the human-animal bond has strengthened and veterinarians prefer to work in a more professional environment.
Another big driver is the shortage of veterinarians. The demand for veterinarians is far outpacing the number of vets coming in. There aren’t enough veterinarians to cover all the shifts today as so many practices expand their hours.
What factors do you consider when looking for the right veterinary facility?
Eisenstadt: We look at a few factors. On the facility side, purpose-built matters to us. But you could have a bank building, say, that has been converted to a veterinary building that works well. We look at the quality of the building. We want the internal systems of a building to be good. Parking matters an enormous amount. You need good visibility from the street. The other thing that matters to us is the quality of the tenant. That is almost as important as the quality of the facility. If you have a large veterinary practice that has been in business for 40 years and is a staple of the community, that matters. If the practice is financially stable and profitable, that matters, too. If it is owned by a corporate group that is well-established, that is great.
What we get concerned about is if we see a lesser building that has no room for growth and poor parking. We aren’t interested in older facilities that look tired or have a lot that is too small.
How have rising interest rates impacted this commercial real estate type?
Eisenstadt: Like all commercial real estate, most buyers are using debt to finance the purchase of veterinary buildings. The increase in the cost of debt decreases the return you are going to get. It is true that we have started to see cap rates inch up in this space. There has been a lot of interest in veterinary real estate from 1031 Exchange buyers. These are stable assets. They didn’t have to close for COVID. So there was a bit of a lag in the bump in cap rates. Now we are starting to see a shift in that.
We are not immune to interest rates. We have a debt facility led by a syndicate of banks. We are proactive in trying to cap our interest rate exposure. We are still in a pretty good position. We have equity and det that is committed.
Do you plan on acquiring new veterinary assets in 2023?
Eisenstadt: We have our third fund, a $190 million equity fund, about half invested. We will continue to put properties under agreement in that. During the summer, we launched a private REIT that is entirely focused on veterinarian practices with strong buildings, veterinarians who want to swap their buildings for a piece of a REIT partnership. They can go from one building to owning a partnership interest in 20 or 50 buildings.
We expect to continue to invest in the next year. Commercial real estate is still a good investment. If you have good tenants that can perform through inflation and recessionary periods, commercial real estate can be a great driver of cash flow.
People are going to continue to spend money on medical care for their pets. They are going to take their sick pets to the hospital or clinic. We are always going to need facilities for veterinarians. We like this niche. When we started in this space 10 years ago, people would always say, ‘You’re investing in what?’ Over time, that is changing. This little nice of veterinary real estate has emerged a bit. We are excited about what the future holds.