IllinoisNet Lease Net-leased medical properties see cap rate reversal Matt Baker December 11, 2019 Share on Facebook Share on Twitter Share on LinkedIn Share via email How has the medtail phenomenon progressed in 2019? Single-tenant, net-leased medical properties saw a reversal of year-over-year cap rate movement. According to a third quarter Net Lease Medical Report issued by Wilmette, Illinois-based The Boulder Group, net-leased medical assets declined 2 basis points in 2019 to 6.45 percent. At this time in 2018, the asset class had seen a 22-basis-point increase. “The medical sector is one sector that is largely e-commerce resistant,” said Randy Blankstein, president of The Boulder Group. “There aren’t too many situations where patients can diagnose themselves and receive treatments in their own home. Consumers and service providers typically meet in a face to face setting.” Net-leased healthcare properties tend to enjoy strong rental escalations. However, the sector is significantly impacted by a high percentage of non-investment grade tenants, as well as a larger concentration of properties in secondary markets. Available properties typically have diminishing lease term remaining. Larger hospital systems have been on an acquisition spree of late, snapping up smaller healthcare groups and one-off physician groups in order to expand their off-campus patient facilities. These mergers have led to a higher overall supply of net-leased medical properties. Boulder Group data shows that in the supply of these properties increased by more than 17 percent in the third quarter of 2019. Demand for single tenant healthcare properties continues to be driven by high-net-worth and institutional investors, though their individual focus on property types varies by tenant strength. The Boulder Group recently brokered the $3,453,692 sale of a single-tenant, net-leased Fresenius Medical Care property located at 1920 Sheridan Road in Zion, Illinois. “Private investors are more drawn to credit-backed tenants, like dialysis leader Fresenius and hospital system-backed leases,” said Jimmy Goodman, principal of The Boulder Group. “Conversely, institutional investors are more actively pursuing properties where leases are backed by physician groups which allow for higher cap rates.” Despite strong demand across the board from investors, a limited amount of investment-grade tenants in the sector had led to a 10-basis-point discount of net-leased medical properties. In fact, only 27 percent of the supply of medical properties were leased to investment-grade-rated tenants in the third quarter of 2019. Year-over-year, the most significant jump in cap rates, by category, was for dialysis properties, rising 15 basis points to 6.15 percent. The change is primarily the result of an increasing supply of available properties with a shorter lease term remaining. The cap rate for urgent care properties—which declined 5 basis points in 2019 to 7.25 percent—remain the highest. General doctor cap rates compressed by 6 basis points in 2019 to 6.75 percent after a notable increase of 31 basis points to 6.81 percent in 2018. According to The Boulder Group, single-tenant, net-leased medical properties will remain an active area of investment for the foreseeable future as investors are attracted to the long-term outlook for healthcare properties. The attractiveness of this sector will play out further because of it is largely e-commerce resistant, the continued aging demographic of the population and cap rates that remain attractive when compared to the overall net lease sector. “It’s a combination that, for the foreseeable future, will produce stable results for the single-tenant, net lease medical property sector,” Blankstein said.