Healthcare Real Estate Transactions

Jackson Health Confirms $90 Million Expansion. Jackson Health System has selected Skanska USA as the contractor to complete a $90 million renovation and expansion project that would make Miami’s largest hospital system even bigger. The project includes the demolition of two buildings to make way for tripling the size of the system’s emergency department at Jackson Memorial Hospital. The entire expansion project cost is estimated to be $300 million upon completion. The project also entails the relocation and installation of underground utilities. The new emergency department, designed by global architecture firm HKS, will be 130,000 square feet and include 207 new rooms, including 50 observation and seven patient rooms.

$5 Billion Pediatric Health Campus in Texas. Two healthcare systems in Texas are teaming up to develop a new $5 billion pediatric health campus earmarked for more than 33 acres in the Dallas Medical District to help grapple with the rapidly growing need for more pediatric services in the Dallas-Fort Worth region.  On February 7th, Not-for-profit Children’s Health and UT Southwestern Medical Center unveiled plans to build a new 4.5 million-square-foot pediatric campus, offering a so-called patient-centric facility design to serve as a joint hub of innovation, academic research and training to care for the youngest residents of the region. The campus, with two 12-story towers and a third tower rising eight stories, is expected to replace the existing Children’s Medical Center Dallas on the UT Southwestern campus on the corner of Harry Hines Boulevard and Mockingbird Lane. The new Dallas pediatric campus, including a 2 million-square-foot hospital, is expected to open to patients upon the anticipated completion of the project within the next seven years.

Healthpeak Plans for Two MOBs on HCA Campuses. Denver-based Healthpeak Inc. (NYSE: PEAK) plans for two on-campus projects for Nashville, Tenn.-based HCA Health (NYSE: HCA), according to the REIT’s Q4 2023 report. The projects comprise a fully pre-leased, 72,000 square foot medical training facility on the campus of HCA’s Medical Center of Aurora (Colo.), where Healthpeak currently owns three MOBs; and a 120,000 square foot MOB on the campus of the 281-bed HCA Medical City McKinney campus in McKinney, Texas. The projects are part of Healthpeak’s programmatic development program with HCA, under which the REIT has delivered nine outpatient facilities and has three additional MOBs currently under construction.

Healthcare Real Estate Recent Trends

MOB Sales drop and CAP Rates Increase through end of 2023. With interest rates rising quite dramatically during the past year, the MOB sales volume fell to a low point in 2023 compared to every year dating back to 2016, according to the most recent statistics from Arnold-based Revista, which compiles and distributes healthcare real estate (HRE) and MOB data for its subscribers. MOB sales fell to about $1.4 billion in Q4, matching the lowest quarterly total – recorded just a quarter earlier in Q3 2023 – since 2016. For all of 2023, the MOB sales volume stood at $7.6 billion as of Jan. 18, one of the slowest (fourth quarters) MOB sales volume over the last 12 months that Revista has been tracking the information.

Subsequently, with the slowdown in MOB sales has come a slowdown in financings for MOBs. According to RevistaMed data, there were 354 new MOB mortgages in Q4, which was about the same as in Q3. Those totals were down significantly from most quarters dating back to 2016, as the quarterly totals during that span were typically between 800 and 1,200 mortgages per quarter. As for pricing, capitalization (cap) rates, or expected first-year returns, MOBs continue to rise and the price per square foot (PSF) continues to fall, although both cap rates and the PSF have steadied as of late. In Q4 (2023), the average PSF for MOB sales on a trailing 12-month basis (TTM) was $346, down 12 percent from a year prior. The average cap rate in Q4 was 6.9 percent (TTM), which was up about 80 basis points from a year earlier. During the past year, the average cap rate has been increasing about 20 to 30 basis per quarter. The average occupancy rate of MOBs in the country’s top 50 markets rose to 92.8 percent in Q4 2023, up about 160 basis points from the end of 2021 when the occupancy rate was about 91.2 percent. The amount of new MOB space completed in Q4 was about 1.4 million square feet in the top 50 markets, down from about 2.2 million square feet completed in Q3 and marking the lowest quarterly total since 2016.

Pinnacle Real Estate Group Assessment

The Downward Trend Continues, How Much Longer? The primary factors that continue to influence this somewhat necessary slowing downward trend beyond a natural market cycle are the rising interest rates, difficulties in securing debt, increasing construction costs, labor, and supplies shortages. All of these have stemmed the impressive volume that occurred over the past couple of years. The path going forward seems that this slowing downward trend will continue for a good portion of 2024, if not its entirety, and more than likely continue to have its intended impact on certain extraordinary market factors created by unprecedented situations from the previous couple of years. Understanding the pending election at the end of this calendar year and its potential impact on most markets, we don’t believe any significant change to the current trend will occur prior to the conclusion of the election.

For more information, please contact Director Mike Vandaveer at MVandaveer@AskPHC.com.