ACA Spurs Medical Office Real Estate Surge

healthcare reformMy Comments: Am not really sure what this means but anytime I see a positive outcome that may be the result of the PPACA, I pay attention. That’s because I want the PPACA to work, and work well. It’s past time to really identify its flaws and get people to fix them to the benefit of ALL OF US. Of course, some of this is purely demographics, and there will be moans and groans fifteen years from now when the baby boomer generation starts to shrink and there are fewer old folks needing care.

By Brian Louis / January 14, 2014

(Bloomberg) — Obamacare and an aging U.S. population are spurring purchases of medical office buildings, with investors sending prices to a record on bets that Americans’ demand for health services will increase.

Sales of properties leased by doctors and other health care providers reached $6.67 billion in 2013, the second-highest total in 13 years of data-keeping by Real Capital Analytics Inc. Buyers including real estate investment trusts paid an average of $270 a square foot, up from $262 in 2012 and the most on record. The increase partly reflects deals for newer buildings with the latest technology, according to the research firm.

“It’s a really competitive space,” says Steve Sikes, manager of real assets at the Alaska Retirement Management Board, which is considering buying $150 million to $200 million of medical offices in what would be its first direct purchases of the properties. “Hopefully there’s enough of these out there for everyone.”

The buildings generate steady income from multiyear leases and offer higher investment returns than other types of commercial real estate. Buyers expect occupancies to climb along with the need for medical services as baby boomers age and more people get insurance under the Affordable Care Act. More than 975,000 Americans signed up in December to buy plans under the law, which guarantees health coverage to all residents and penalizes those who aren’t insured.

Cash flow

The properties include doctors’ offices, urgent-care clinics and diagnostic laboratories and imaging centers. Their stable cash flow makes the buildings particularly attractive to REITs, which are required under U.S. tax laws to pay out at least 90 percent of their income to shareholders, according to Dan Fasulo, managing director at New York-based Real Capital.

“You have built-in demand drivers vis a vis the demographic trends that fundamentally don’t exist in other real estate,” says Jeff Hanson, chairman and chief executive officer of Griffin-American Healthcare REIT II Inc.

The Irvine, California-based company, a nonlisted trust, purchased $816 million of medical offices in the two years through Jan. 2, making it the biggest buyer after publicly traded Ventas Inc., which acquired 72 such buildings in its April 2012 purchase of Cogdell Spencer Inc.

Investor interest in medical-office buildings is driving up values. Capitalization rates, a measure of returns that declines as purchase prices rise, reached a six-year low of 7.3% nationally in 2013, Real Capital data show. That’s still higher than the 6.4% average cap rate for general offices and 5.7% for apartments, according to the firm.