(Bloomberg) — The Patient Protection and Affordable Care Act (PPACA) 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," said 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 PPACA. 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," said 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 percent nationally in 2013, Real Capital data show. That's still higher than the 6.4 percent average cap rate for general offices and 5.7 percent for apartments, according to the firm.
Hospital landlords
More than 90 percent of about $1 trillion of health-care properties are still in the hands of hospitals and medical systems that may no longer want to be landlords, creating plenty of opportunities for institutional buyers, according to Hanson.
Among his company's 2013 acquisitions were six buildings purchased from Middletown, New York-based Crystal Run Healthcare, a specialty physician practice group, for a combined $141 million. Crystal Run agreed to lease back the offices with 3 percent annual rent increases through 2033.
Griffin-American, owner of health-care real estate in 30 states and the U.K., buys stable, well-leased properties rather than buildings that need major renovations, Hanson said.
"We're an income REIT," he said. "Stability and growth of our dividend is paramount for our shareholders."
High occupancies
The company's medical offices are 94 percent occupied and have a lease-renewal rate of almost 90 percent, according to Hanson. That compares with a nationwide 65 percent rate for industrial real estate and other types of offices, he said.
