One thorn of experience is worth a whole wilderness of warning.
James Russell Lowell
Elaine Misonzhnik Feb 20, 2015
Healthcare real estate in Phoenix also has potential. Marcus & Millichap estimated its average vacancy rate at 21.6 percent. At the same time, Phoenix ranked ninth on Colliers’ list of U.S. cities with the largest forecasted increase in population 65 years of age and older between now and 2019. Average quoted rents in the city in 2014 were decent, at $22.62 per sq. ft. Meanwhile, investors were paying average cap rates of 7.7 percent and average prices of $122 per sq. ft. for Phoenix assets, compared to the average of 7.23 percent and $216 per sq. ft. for the nation.
If we are to believe the wisdom of crowds, there has never been a better time to invest in healthcare real estate. According to research by brokerage firm Marcus & Millichap, in 2014, investment in U.S. medical office buildings of 20,000 sq. ft. or larger broke historic records for both number of transactions, at 315, and dollar volume, at $4.9 billion.
“It’s really a seller’s market. The investment community has a great deal of capital available and for class-A product, with a good credit tenant, you are seeing a great deal of competition,” says Mary Beth Kuzmanovich, national director, healthcare services, with commercial real estate services firm Colliers International. “If you have a lower credit tenant or class-B or –C product, you are seeing much higher cap rates, but investors are still picking up those [properties].”
The question is where should investors go in 2015 to get decent yields? The answer when it comes to healthcare properties is not as straightforward as it may be for other asset classes, notes Kuzmanovich. A good rule of thumb, according to both her and John R. Smelter, senior director of the healthcare real estate group at Marcus & Millichap, is to concentrate on markets with sizeable population growth, especially among the baby boomer set, and affordable housing options. But the availability of class-A properties occupied by hospital systems with good credit also plays a role. There would have to be “investment grade property to buy and the healthcare buildings that are being offered are oftentimes part of a portfolio,” Kuzmanovich says. Meanwhile, Smelter points out that even though gateway cities like New York and San Francisco may have extremely low cap rates, they also offer lower risks.
To take into account all of these considerations, we looked at 15 cities that have a variety of attractive qualities, from low vacancies to high projections for population growth among the 65 and older cohort, based on observations and research reports from both Marcus & Millichap and Colliers. We took out New York and San Francisco as being on most investors’ wish lists for all property types. For a list of other markets that may be worth a look, click though our gallery.
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Walter Unger CCIM
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