Healthcare Real Estate Transactions and New Construction
Texas Children’s $201 Million Expansion in Houston
Texas Children’s is planning to reconfigure the real estate at its existing 15-story tower at 6620 Main St., which is getting renamed Main Tower, as well as changing its operations across the street at 6651 Main St. Texas Children’s bought 6620 Main St. from Baylor St. Luke’s Medical Center in 2016. Baylor College of Medicine vacated two of three of its floors in 2020 and still leases one floor in the building, a Texas Children’s spokeswoman said. The first phase of the expansion plan is expected to be completed in the spring of 2022. The full expansion is expected to be completed in 2024. The two buildings will be connected by a newly constructed skybridge. In total, the project gives Texas Children’s another 190,000 square feet of usable space within its existing buildings.
Biotech Firm Artiva Leases Large Space for New Headquarters in San Diego
San Diego-based Artiva, which develops cancer-related therapies and treatments, leased 52,000 square feet at a building currently under redevelopment by owner Alexandria Real Estate Equities at 5505 Morehouse Drive. The space will house new research, manufacturing and laboratory facilities after Alexandria completes construction in 2022, as Artiva expands from its current location in the city’s University Town Center neighborhood.
Anchor Purchases MOB in San Diego Area
Anchor has closed on a 54,703 square foot, two story medical office building located in the Oceanside/Vista submarket of San Diego. This select building is one of the top remaining third-party owned assets in the San Diego MSA. The building is located conveniently by the Tri-City Medical Center, a 320-bed hospital district campus serving the North San Diego County. The facility contains an on-site pharmacy, secured subterranean physician parking, open atrium, and ample on-site parking for patients and visitors. Anchor will provide go forward asset and property management at this location.
Healthcare Real Estate Trends
MOB Delays and CAP Rates
MOB project completions continue to slow in 2Q, down to 17 million square feet in annual deliveries. This is the lowest pace of deliveries in the last 6 years and represents a 32% decrease from the annual run rate of 25.1 million SF in deliveries in 1Q2020- just before the onset of COVID and all the related shutdowns, restrictions and labor shortages. Despite all of these headwinds, project starts have remained remarkably stable, suggesting the pandemic has largely been causing project delays after breaking ground. In addition, CAP rates for MOB properties are continuing a trend of compressing during the past several years. Updated 2nd quarter, 2021 Revista data reveals the median MOB cap rate was 5.8%. This was down from 6% in 1Q21 and 6.3% one year ago. This compression is consistent with heightened investor demand.
Pinnacle Real Estate Group Assessment
Healthcare Real Estate Continues to Gain Momentum and Popularity
The world has significantly changed and continues to change in the past twenty plus months on varying levels and wide-ranging aspects. One of those changes is with the previous perception and now reality of healthcare real estate. Prior to the beginning of 2020 the general consensus within the commercial real estate industry was healthcare was a niche subsection of the industry due to its inherent differences to other sectors along with its more complicated and specialized aspects. Because of that it only involved only a relatively small group and was not considered on the same level as industrial, retail, office, and multi-family which resulted in healthcare properties historically receiving higher CAP Rates compared to their cohort sectors. With the combination of recent factors the past twenty months to include but not limited to: the COVID-19 pandemic and reaction to it, the “Amazon Effect” on retail, the “Zoom/Teams Effect” on office buildings, the resiliency of the healthcare industry, along with several other factors, the previous perception and reality of the healthcare real estate has now drastically changed which we believe will continue indefinitely. Not only has the environment since early 2020 leveled the playing field it has turned some factors completely upside down. The “retailization” of Medical space, also known as “Medtail”, where retail properties are being converted to medical has been gaining momentum is now continuing into office properties. With the combining factors of increasing construction costs, delays on new development projects, and increased funds flowing into the healthcare sector, the “officeization” or “Medfice” type projects, both new terms we believe will start to quickly catch, seems destined to become a continued growing aspect of the commercial real estate industry in the foreseeable future. To conclude, we believe healthcare real estate is removing the niche perception and becoming a popular component of the commercial real estate industry.
Christopher Louis, ASA, MAI