December 6, 2017
Compared to the overall net lease market, properties in the medical sector traded at a discount during the third quarter, according to The Boulder Group’s recent report. The average cap rate for the overall net lease market was 6.20% versus 6.25% for medical net leases, which is a decrease of 25 basis points compared to the previous year.
The difference in pricing can be attributed to the high concentration of non-investment grade rated tenants within sector, which consists primarily of urgent care centers, dialysis centers, dental offices, physical therapy offices, physicians’ offices, and specialty offices priced at $10 million or less. In the third quarter 2017, non-investment grade tenants comprised approximately 68% of total supply.
“Unless a facility has an explicit guaranty from a larger healthcare system, it’s most likely non-investment grade,” explained Randy Blankstein, president of The Boulder Group (pictured above). “There are many doctor groups that guaranty their leases, and this does not have the same financial backing of a large healthcare system. When dealing with smaller groups or non-rated tenants, it’s important to really understand the balance sheet of the tenant.”
In the third quarter 2017, the median price of net lease medical properties was approximately $2.7 million. So far this year, private and 1031 investors represented 66% of buyers in the medical net lease sector.
Blankstein said many investors either like the space because of the trending demographics of the country, or they want to re-allocate a portion of their real estate holdings to include medical.
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