January 7, 2020
It’s a brand new year—hello, 2020!—so Connect Healthcare tracked down Erik Tellefson of Capital One Healthcare for an exclusive Q&A. Read on for his 2020 MOB outlook…
CONNECT HEALTHCARE: What kind of investor appetite do you expect for medical office buildings (MOBs) in 2020?
TELLEFSON: We expect similar investor appetite for MOBs in 2020. The current investor paradigm—both from the overall volume of financed assets, as well as the makeup on a percentage basis of the investor types—looks to continue in a similar fashion in the year ahead. The primary wild card in the investor composition will be the number of deals that public REITs will transact on. When comparing 2019 to 2018, last year appeared to be a much more robust public REIT acquisition market. The activity in the coming year will likely depend on the REITs’ stock prices as to how much of the MOB acquisitions pie that they take. In 2018, when the REITs were less active, the private and institutional buyers ended up with a larger percentage of similar overall volume so it appears any vacuum will be filled with a different type of investor. At the end of the day though, we expect 2020 to look very similar to 2019 in the MOB space.
CONNECT HEALTHCARE: How would you characterize the investment activity that occurred in 2019? Did anything surprise you?
TELLEFSON: I would characterize 2019 as a robust year for MOB volume. Although it was not necessarily a surprise, the public REITs were significantly more active than in 2018. A bigger surprise was the amount of institutional investment in the MOB space, as well as the several new institutional entrants. Institutional investors–large private equity firms, pension fund managers, etc. –have always been participants in the space, but often the same cast of characters typically dominated the MOB arena. This trend started in 2016 with Starwood, and has expanded to multiple new institutional investors as it picked up steam in 2019. It has greatly influenced the market deals with larger, diversified portfolios and core investment grade assets becoming a larger part of the market due to the institutional investor appetite. At Capital One, we have seen a similar trend with both the average and the high-water mark for loan amounts increasing each year, and 2019 will no different. Both the largest deal we financed this year and our average loan size significantly increased from 2018.
CONNECT HEALTHCARE: Is there a deal that Capital One has financed recently that you’d like to tell us about – perhaps something made it particularly interesting or it represents a trend in the industry?
TELLEFSON: One of our most recent deals was for a life science transaction—an asset class that we finance along with medical office buildings and medical properties. The deal was for Blackstone BioMed and was a $430 million deal to finance phase one of a life science campus in San Francisco led by JP Morgan. It was noteworthy for Capital One because we’ve been increasing our presence in the life science space. While we typically agent and syndicate large MOB transactions, and are currently underwriting multiple large transactions with projected 2019 closings, we were happy to participate in this life science debt facility and look forward to doing more both as agent and participant in these types of deals.
CONNECT HEALTHCARE: When it comes to new MOBs, have financing terms changed much in terms of pre-leasing, etc.?
TELLEFSON: From a construction take out or acquisition financing perspective, our terms have not materially changed. We are happy to review any medical transaction, although the vast majority are north of 70 percent occupied and cover debt service. While we do not finance the same volume of construction loans as we do acquisition, refinance/recap and construction take out volume, we are doing more construction than we have in the past. That being said, our terms have largely stayed the same for new assets that are often significantly pre-leased and similar to the other types of medical office finance.
CONNECT HEALTHCARE: From 2010 to 2020, a lot of things changed in the MOB world. Any thoughts on how things may change over the next decade?
TELLEFSON: In the past decade, things have changed considerably for us. Average loan sizes have increased, there are more portfolio transactions and more institutional borrowers. For the next 10 years, while I have no predictions, I am interested in seeing how the institutional buyers continue to shape the space. Will they stick with the MOB space? Do loan sizes continue to increase in size or plateau or even go the other way at some point? What place will medical properties (hospitals, ASCs, dialysis centers, inpatient rehab facilities, etc.) play in the overall market, and how will the medical office asset class establish itself within the broader commercial real estate world? At one point we were a niche asset class, but MOBs have never been more popular. In any event, similar to the last decade, Capital One expects to continue to lead the financing market, and more importantly, continue to execute on financing for our customers.
For questions, comments or concerns, please contact Jennifer Duell Popovec