Capital Market Analysis

Capital Market Analysis

Lee Jackson, VP of Capital Markets Equity, Inc.

 

A thorough understanding of capital markets is critical when considering the purchase of a medical office building (MOB).  Lee Jackson, VP of Capital Markets for Equity, Inc. is our in-house expert and our go-to source for valuable industry information.  Jackson foresees an industry-wide increase in interest rates, due in part to the discontinuation of the Fed’s bond buying program.

 

MOB CAP Rates and Interest Rates

According to Jackson, cap rates haven’t caught up to Wall Street’s rising expectations of increasing interest rates because of the lack of existing inventory.  “However, with new larger medical office buildings coming online (driven by payment and delivery changes of the Affordable Care Act), cap rates will start to climb within 12 to 24 months”, Jackson says.  “At first, the increase in cap rates won’t be as noticeable (15 to 25 basis points in the next 12 months), but cap rates will gradually begin to tick up 35 to 50 basis points per year, over the next few years”.

 

Owner Occupied MOB’s

How does a rising cap rate trend impact physicians that own and occupy their medical office space?  Simply put, rising cap rates and interest rates mean that if the current net operating income of a medical office building stays the same, a buyer will pay less for this building in the future.  To prepare for this, Jackson strongly suggests physicians engage a medical office expert to help them clearly define their real estate exit strategy.  Too often physicians do not plan an exit strategy because they assume that their practice will not change or that they will eventually sell their practice and real estate to another physician.  However, this is a perilous gamble when most physicians coming out of residency today are opting to become employees of larger medical groups or hospitals. Physician owners should be looking ten years down the road, and asking themselves, ‘What will my practice look like 10 years from now, and how will this affect my real estate needs and my real estate portfolio?’  It is also probable that a merger with another medical or physician group may fall within this timeframe.  Selling a medical office building or unraveling a real estate partnership may be a part of these transitions.  Seeking the help of a dedicated real estate professional and a knowledgeable real estate attorney are critical steps in facilitating a smooth transition.