Commercial real estate companies seek secondary markets, office sector opportunities

As investors seek out higher yields in secondary markets, the medical office sector is poised for a strong year.

As commercial real estate and multifamily investors seek secondary markets in the pursuit of promising yields, the medical office building market is gaining momentum.

During the housing crash, many investors stampeded toward the major metropolitan markets looking for a higher yield and a safe investment. Now that capital has loosened up, those saturated, low supply markets are losing investors to secondary and tertiary markets. 

"Markets that people gave up on are now markets that people are going back to," Walter Page, director of research for CoStar, told the National Real Estate Investor. "In most primary markets the average price per square foot is twice what it is in secondary markets."

Page cites Orange County, an ideal secondary market, not in the well-performing multifamily sector, but the office sector. Years ago, notes Page, office vacancy rates were near 19 percent. They have since fallen almost 6 percentage points, and are projected to fall even more as more investors move in.

The office hotbed
The dwindling supply of high-quality commercial properties is causing a surge in property values. The medical office sector, specifically, is experiencing higher than normal yields. 

"There's more capital out there chasing deals than there are properties," Mindy Berman, managing director of JLL's Healthcare Capital Markets, told NREI. "It's been a record year and a half for medical office."

According to a recent Jones Lang LaSalle study, sales volume of medical office portfolios are estimated to peak at $2 billion for the second consecutive year as healthcare REITs move forward with purchases. 

As Berman notes, hospitals own the greatest share of medical office buildings and frequently partner with developers to construct or expand facilities. Developers are the real winners in this scenario. With supply so tight, they can unload properties, and people are willing to pay, according to NREI.

"One of the appealing aspects of this property type is that it is sticky, the tenants tend to stay a long time," James Clark told NREI. "For a doctor to move the main patient office is unsettling, so retention in these leases is usually pretty high. That's easier on the landlord, who doesn't have to continually rip out and put in improvements, it's less capital to employ."

Healthcare REITs are securing more of the office market supply and holding onto it as the rush for secondary markets attracts more capital.

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