Trends & Insights

Originally published by GlobeSt Nationally it appears that there is insufficient square footage available to accommodate the significant growth seen in the healthcare real estate sector, with the rate of absorption outpacing new product deliveries, according to Northmarq.  “This has put national occupancy rates for medical office at a historic high,” Colin Cornell, Northmarq vice president, healthcare investment sales, tells GlobeSt.com.  “We anticipate a steady stream of opportunities for investors in 2023, including newly developed facilities, new long-term leases on historically vacant MOBs, and retrofits of what were historically retail-oriented buildings.”  Cornell said that like most sectors, healthcare has been in the price discovery stage since interest rate increases began, but values seem to be settling somewhere between 2019 and 2021 levels.  “The investor demand is there, and the question is will owners be willing to meet that demand at the new return buyers requires,” he said.  These investors are best to focus on outpatient services, according to JLL’s most recent Healthcare and Medical Office Perspective, which shows that outpatient sites dominate healthcare services delivery compared to hospital admissions.  Additionally, according to Kaufman Hall National Hospital Flash Report, outpatient revenue rose 8% in 2022, while inpatient revenue was flat when compared to 2021.  JLL’s report said that up to a third of hospital revenue is activity shifting to ambulatory surgery centers, office-based labs, and other ambulatory sites.  “More sophisticated procedures can be done in outpatient settings than possible a decade ago.” Amber Schiada, head of Americas work dynamics and industry research, JLL, said in prepared remarks.  “Innovation in care combined with reimbursement pressures are driving a sustained shift to outpatient facilities, and consumer preferences for outpatient care have increased as well, as outpatient facilities are often more accessible or conveniently located,” she said.  “Furthermore, experience shows that outpatient locations are less expensive to build and operate, produce better-quality medical outcomes, and yield higher rates of patient satisfaction.  MOS and Health Care RE Producing Income  Allan Swaringen, President & CEO of JLL Income Property Trust, tells GlobeSt.com, “Medical office space, and healthcare-oriented real estate more generally, will continue to be a key piece of an income-producing, core fund such as JLL Income Property Trust.  “The extremely positive demographic trends driving tenant demand for this sector, combined with the often-long-term leases of tenants who look to serve their local population and often invest heavily in building improvements, create a scenario where owners can generate long-term, stable cashflow,” he said.  “That’s why we have continued to construct a geographically diversified healthcare-oriented portfolio that today is valued at nearly $635 million and totals approximately 1.4 million square feet.  The Continuum of Care  Andrew Salmon, chief future officer at SALMON Health & Retirement, tells GlobeSt.com that given the aging demographics, “it’s no surprise that we are seeing an explosion in need for outpatient facilities.  “What’s pivotal is the consideration for the continuum of care, as the 80+ population is forecasted to balloon nearly 50% in the next 10 years, and they will require both inpatient and outpatient opportunities as they age.  “Our goal is to establish the continuum of care across the aging population, to ensure that independent and assisted living opportunities exist with convenient, local access to major medical providers, allowing our residents to maximize the outpatient system while maintaining independence.”  Outpatient Services Leads to Higher Satisfaction  Doug King, national healthcare sector lead for Project Management Advisors, tells GlobeSt.com that healthcare providers have been actively positioning outpatient services closer to where their patients reside for at least a generation.  Outpatient facilities typically result in higher patient satisfaction, King said, and the challenges to outpatient facilities presented by telehealth and home healthcare are minimal as many clinical limitations and regulatory challenges exist for these two off-site methods.  “Decentralized ‘brick-and-mortar’ outpatient facilities will continue to grow,” according to King. “A vast majority of care will be occurring in outpatient settings, including urgent care centers, free-standing emergency departments, medical office/doctor offices, and ambulatory care facilities – outfitted to accommodate same-day surgical activities.  “In healthcare, we say, ‘follow the money’ and The Center for Medicare and Medicaid services are reviewing how reimbursement strategies can promote this model. An example is the growth of OBL (office-based labs) to house sophisticated surgical and imaging services performed on an outpatient basis.”  Developing, Rehabbing, Modernizing Facilities  Mitch Creem, principal of GreenRock Capital, tells GlobeSt.com that investors have always viewed medical office buildings as safe investments during uncertain financial times, primarily due to their historically proven resiliency during market downturns.  “But now, 75 years after the Boomer generation was born, we are expecting a ‘gray tsunami,’ fueling the need for additional healthcare services and many more sites of care,” Creem said.  “Physicians, hospitals, real estate investment funds, and individual investors are all keen on developing new sites or rehabbing and modernizing existing buildings to provide state-of-the-art care and attract new patients.”  Deliver Care in Outpatient Settings More Economical  Brian Edgerton, senior vice president, healthcare services team – NAI Hiffman, tells GlobeSt.com that after historic growth in 2021-2022, the sector is not without headwinds.  “It saw rising cap rates and fewer starts and deliveries at the end of 2022,” he said. “In 2022, healthcare real estate developers kept busy delivering modern medical office buildings to accommodate health systems and large multi-specialty practices, including those seeking to consolidate multiple specialties under one roof in highly visible, patient-proximate locations.  “At the same time, developers are feeling the squeeze of construction cost increases, supply chain delays, and interest rate hikes, all of which are reflected in the higher rental rates that must be charged to make these deals pencil out.  “Yet, even if they’re paying more today than they would have a year ago, it is still more economical and efficient for providers to deliver care in outpatient settings, many of which are located in close proximity to where their patients live and work.”  Edgerton said that like retail, healthcare increasingly follows rooftops, “so services are moving closer to the patient thanks to technological advancements that can more easily be implemented in newly developed and repurposed buildings, rather than the medical office building of 30 years ago.”  When Choosing Project Sites, Demographics Matter  Craig Gambardella, vice president at TSCG MD, tells GlobeSt.com that clients understand that their property, and a potential fit for an outpatient healthcare facility within that particular property, is crucial in their decision-making.  “You must look at demographic, psychographic and prevalence of diseases in certain trade areas, and 5- to 10-year projected growth of not only disease prevalence, but how that translates to outpatient demands to help health systems forecast potential growth,” Gambardella said.  For example, the owner of a large mall that is looking to repurpose a portion of it into medical must accurately forecast the demand in that area for an outpatient facility, what types of clinical services may be needed, based on disease prevalence and 5- to 10-year projected growth, he said.  A Continued Extension of Outpatient Services  Rich Steimel, senior vice president and principal in charge, healthcare, New York, at Lendlease said that throughout the industry, more procedures are taking place away from the main clinical facilities as there is a continued extension of outpatient services across metro areas and into the suburbs.  “This shift allows hospital campus operations a greater opportunity to expand and connect with a growing base of patients who require critical care but desire the convenience of off-campus facilities.”  © 2022 ALM Global Properties, LLC. All rights reserved. 

Originally published by GlobeSt It seems that inflation and a slowdown in the capital markets may have finally caught up with the single-tenant net lease sector, which has posted its fourth consecutive quarter of declining activity, according to an analysis from Northmarq.  In Q4, the single-tenant net lease market saw approximately $14.9 billion in sales, down nearly 16% quarter over quarter and down 66% year-over-year. The overall average cap rate also increased for the first time in three years. However, annually, the industrial market had its second strongest year ever with more than $40 billion in sales, while office and retail posted numbers in line with average volume years.  “The fourth quarter comparison is perhaps overly dramatic due to last year’s record-setting final quarter, but looking forward, it’s likely that we’ll continue to see lower levels of sales volume in the coming quarters rather than a return to near-record highs,” says Lanie Beck, Northmarq Senior Director, Content & Marketing Research. “There is currently enough uncertainty in the market that some investors may choose to observe from the sidelines, taking a more cautious approach. Alternatively, as pricing trends shake out, investors seeking higher yields may find new opportunities.”  Noting that it’s unlikely that investment activity in the sector will stop entirely, Beck also says “the market should be prepared to see conservative activity levels in at least the first half of 2023.”  “Past the mid-year point, demand will be influenced by economic conditions – especially if we enter a recession – interest rate levels, supply/demand dynamics, and the willingness of sellers to correctly price new-to-market assets,” she says. “An imbalance with any one of these influences could impact overall demand levels for 2023 and beyond.”  Multi-tenant retail has also seen a pullback, despite having previously been on pace in 2022 to hit a historic high. Fourth quarter activity slowed so much that the year ended as the fourth strongest ever as multi-tenant retail cap rates jumped by 10 basis points in Q4 and now sit at 6.78 percent.  “This is the highest average cap rate reported in a year, and while it’s likely the start of additional upward movement, cap rate increases are not expected to be dramatic in the next few quarters,” Beck says.  © 2022 ALM Global Properties, LLC. All rights reserved. 

Northmarq’s Cincinnati office has announced the addition of Vikaas Patni as senior associate – commercial investment sales. Patni specializes in the disposition and acquisition of both single-tenant net lease properties and multi-tenant shopping centers throughout the United States. Prior to Northmarq, Patni served as vice president of Brokerage Services at Lee & Associates and achieved top producer status in 2021. Before Lee & Associates, Patni held leadership positions at Phillips Edison & Co. and Meridian Realty Capital. “I am very excited to be a part of Northmarq and Daniel Herrold’s team. With Northmarq and Stan Johnson Company combining forces, the new platform is now second to none, and I look forward to leveraging this and bringing value to my clients,” said Patni. “Given the exciting growth in CRE happening in and around Cincinnati and Ohio in general, Northmarq is perfectly positioned to bring these opportunities to its clients nationally.” Patni joins a team of investment sales professionals led by Daniel Herrold, senior vice president. With over 15 years of experience, Patni brings a client-focused approach, consulting and guiding his clients throughout the transaction’s entire lifecycle. “I’m really excited to have Vikaas join my team,” said Herrold. “Vikaas has an extensive background in retail, working both on the development side of the business and investment sales. He will be a key ingredient for our team as we focus on retail investors and developers across the Midwest.”

Northmarq investment sales broker Matt Lipson arranged the $1.25 million sale-leaseback of a Sonic Drive-In, a 1,127 sq. ft. single-tenant retail property. The building sits on 0.33 acres of land and is located at 228 West Maple Street in Columbus, Kansas. The property is leased to a 31-unit franchisee at the time of contract signing. Northmarq represented the Missouri-based seller and Hamman Real Estate represented the California-based individual investor in the sale. “There couldn’t be a better location to place a Sonic. The franchisee understands the market and is able to fully maximize the potential of the site. The buyer felt comfortable with the franchisees track record and award-winning success, and both seller and buyer we’re satisfied with price and terms,” said Lipson. “This is a very solid deal for both sides and will ensure the buyer a dependable rent check for now and the future.”  The freestanding restaurant is situated in central Columbus with a population of 3,856 within five miles. In addition to easy access to US Highway 160, the property is near Coffeyville Community College, with an enrollment of 1,772 students and Columbus High School.  Surrounding retailers include Dollar General, True Value Hardware, Subway, Napa Auto Parts, and Verizon Wireless.

Northmarq’s Jeff Enck, associate vice president, and Emery Shane, senior vice president, have completed the sale of a 73,847-square-foot shopping center located at 400 Commerce Drive in Peachtree City, Georgia. The center is 100 percent leased to 21 tenants. Enck and Shane represented the seller, an individual investor based in Washington, D.C. An Atlanta-based developer acquired the asset for approximately $15.2 million.   “The property is an excellent landmark shopping center at the busiest intersection in Peachtree City with a long history of high occupancy by local and national tenants,” said Enck. “Despite the rising interest rate environment, we were able to generate multiple offers from across the country and ultimately close with an investment group based in Atlanta. There was no lack of investor interest in this superb asset.”  Approximately 20 miles southwest of Atlanta and at the corner of Highways 54 and 74, Westpark Walk draws a combined 79,000 vehicles per day. The shopping center’s tenants include Tuesday Morning, Verizon Wireless, State Farm, Firehouse Subs, Hotworx, and local service providers and retailers. One tenant, Ranchero Mexican Grill, has been in Westpark Walk for over 33 years, and several tenants have been at the center for over 20 years.  The property is situated on 5.41 acres and surrounded by several super regional traffic generators such as The Avenue Peachtree City and The Shoppes at Peachtree City. Neighboring national retailers including Walmart, Home Depot, Best Buy, Aldi, TJ Maxx, HomeGoods, and more. Peachtree City is home to over 62,000 people with an average household income over $134,000 within 5 miles.  

Market data, charts & graphs: current and historical trends for single-tenant office, industrial and retail properties, as well as multi-tenant retail Overall market trends Market summary & analysis Economic data points The overall single-tenant net lease market posted its third strongest year in history, with approximately $77.6 billion in sales volume. A strong start to the year, as 2021’s momentum carried over to first quarter 2022, allowed the market to perform as well as it did annually, but recent quarterly activity tells a different story. Influencing factors, like inflation and rising interest rates, have seemingly caught up with investors and sales volume has slowed considerably. In fact, the single-tenant net lease market has now reported four consecutive quarters of declining activity and quarterly totals are down 66 percent year-over-year. The fourth quarter comparison is perhaps overly dramatic due to last year’s record-setting final quarter, but looking forward, it’s likely that we’ll continue to see lower levels of sales volume in the coming quarters rather than a return to near-record highs. There is currently enough uncertainty in the market that some investors may choose to observe from the sidelines, taking a more cautious approach. Alternatively, as pricing trends shake out, investors seeking higher yields may find new opportunities. There is no expectation that investment activity across the single-tenant net lease market will grind to a halt, but the market should be prepared to see conservative activity levels in at least the first half of 2023. Past the mid-year point, demand will be influenced by economic conditions – especially if we enter a recession – interest rate levels, supply/demand dynamics, and the willingness of sellers to correctly price new-to-market assets. An imbalance with any one of these influences could impact overall demand levels for 2023 and beyond.   The multi-tenant retail sector has also witnessed a reduction in activity levels, particularly during the second half of 2022. After a strong fourth quarter 2021, and a second quarter 2022 that was recorded as the third strongest period in history, the sector began seeing a pullback in transaction volume that mirrored the rest of the market. In fact, despite being on pace to have a record-setting year, fourth quarter activity slowed so significantly that we ended 2022 as only the fourth strongest year in history, instead of potentially the first. Multi-tenant retail cap rates jumped by 10 basis points in the final quarter of the year, sitting now at 6.78 percent. This is the highest average cap rate reported in a year, and while it’s likely the start of additional upward movement, cap rate increases are not expected to be dramatic in the next few quarters.    

Originally published by GlobeSt The past two years set the bar quite high for growth in the life sciences sector, according to Matt Gardner, CBRE’s Americas Life Sciences Leader.  “It’s natural for a red-hot market to cool a bit after such a strong run,” he said in prepared remarks.  A new CBRE report said metrics gauging the sector varied in the fourth quarter as the industry normalized after robust growth.  “Life sciences employment growth slowed from earlier rates but still progressed at a 4% year-over-year pace. Venture capital funding rebounded in the fourth quarter after three consecutive quarterly declines” it said, and “the market has normalized.”  CBRE puts Boston, Chicago, Denver, Houston, and Los Angeles as the top-performing life sciences markets in Q4, based on their combined market size, vacancy, square footage under development, and current tenant demand.  Life Science Relies on ‘Different’ Financing Sources  Kevin Kinigstein, partner, Cox Castle, tells GlobeSt.com that he anticipates 2023 to be slower, especially at the outset.  “External factors such as uncertain interest rates, the debt market generally, and inflation are already proving to have an undesirable impact on all commercial real estate, even in the hottest of asset classes,” according to Kinigstein.  That said, the life science sector is influenced by certain differentiating factors that are likely to make the industry experience less of a slow-down than many other asset classes, he tells GlobeSt.com.  “One primary differentiator is that the life science industry relies in large part on different financing sources than conventional commercial real estate,” Kinigstein said.  “Between increased government funds which are coming in 2023, and the continued industry reliance on venture capital, it is likely that life science will outperform other asset classes,” he said.  Additionally, the tie between life sciences and other external driving factors will also continue to differentiate this space.  “The often-cited aging population will continue to drive demand, but there are other outside factors such as the expected continued explosion of artificial intelligence in 2023, and the fact that executives have another year under their belt when it comes to navigating supply chain issues – both of which may prove to be more impactful for life sciences than for other conventional real estate classes.  “While it is fair to expect the market for life science transactions in 2023 to be significantly less hot than we saw in 2021-2022, we believe life science will be among the leading asset classes in terms of demand and growth, and that the slow-down may be less than expected.”  Pandemic-Caused Therapies Drove Growth  Jon Needham, vice president, investment management at BentallGreenOak (an investor in area life sciences real estate), tells GlobeSt.com, “The supply boom that took place in recent quarters certainly alters the calculus when making investments, but in general, a more balanced supply/demand dynamic is important for the health of the sector moving forward.  “While the US Life Science market was down in 2022 compared to the historic high of 2021, removing 2021 outlier data and comparing 2022 with previous years tells a story of health, sustainability, and growth.  “The pandemic fast forwarded approvals and implementation of novel therapies which will prove to be the foundation for growth over the next cycle. As the sector matures and adapts to the integration of new technologies, a continued emphasis will be placed on high quality, robust, and flexible real estate to assist in the advancement of the life science ecosystem.”  Leasing Activity Dropped 62%  Leasing activity across Boston, San Diego, Bay Area, Philadelphia, Greater D.C., Seattle, and Raleigh-Durham are normalizing, according to JLL data.  On an aggregated basis, it dropped 62% from an industry high in Q4 2021 to Q4 2022, and, currently, leasing activity is on par with pre-COVID averages.  Tenant demand activity has slowed, as companies take a more conservative approach regarding space needs. Demand today is just about half it was at its peak in Q4 2021 across markets Boston, San Diego, Bay Area, Philadelphia, Greater D.C., Seattle, and Raleigh-Durham.  Maddie Holmes, senior research analyst, Industry Insight & Advisory, JLL, tells GlobeSt.com that direct asking rents, which had been gradually increasing quarter-over-quarter since the onset of the pandemic, took a discount across those markets.  Kevin Wayer, President – Government, Education, Infrastructure and Life Sciences Industries, JLL, tells GlobeSt.com, “We are witnessing M&A and joint manufacturing activity continues to pick up, but an intense cost-reduction focus continues.”  Expect Slowdown Through Mid-Year  Craig Tomlinson, senior vice president at Northmarq, tells GlobeSt.com that after three high-profile sales (exceeding $250 million) of life science properties in 3Q 2022, RCM data reported none in the last quarter.  “These are very high basis properties, typically +$1,000 per foot,” Tomlinson said. “That, plus the lack of sale comps, explained lenders’ reluctance to fund such transactions.  “The slowdown is expected to continue through mid-year, with the exceptional sale-leaseback possible. Those are typically higher yield as compared to third-party transactions.”  After the Big Run, Normalization is ‘Healthy’  Nick Iselin, executive general manager of development for Lendlease, tells GlobeSt.com that few people presumed that the enormous trajectory in life sciences would continue unabated and ultimately, “this normalization is not only expected but healthy. We are happy to see that activity is still going strong in the top markets, such as Boston where we are co-developing FORUM, a 350,000-square-foot, best-in-class life science project.”  Boston is Still a Leader  Kristen O’Gorman, an associate principal at SCB’s Boston office leading its life science practice, tells GlobeSt.com that the Boston area continues to be a life sciences leader full of resounding innovation, with startups raising over $1.5 billion last year.  “Although tenants may have more options in today’s market, the evolutionary nature of young companies remains true,” she said.  “From a design and real estate perspective, this means a balance of prioritizing high-performing buildings that also offer maximum flexibility that can appeal both to startups and more established companies.  “Now that the marketplace has become more competitive after sustained growth, we see the life science market normalizing, with growing consideration of amenity programming as a way to differentiate.  “A few quarters ago, a potential tenant might have been less focused on this aspect, but now they have an opportunity to be more selective – we see tailoring this amenity programming as a key to adding value and a market edge.”  © 2022 ALM Global Properties, LLC. All rights reserved.

Northmarq’s Isaiah Harf, managing director, arranged the sale of a built-to-suit property leased to Popeyes located at 320 North Beacon Boulevard in Grand Haven, Michigan. Harf represented the seller and owner based in Illinois. A New York-based private investor acquired the asset for approximately $3.1 million.  “Along Beacon Boulevard, just south of Home Depot in downtown Grand Haven (a wonderful city along the western coastline of Michigan) sits a new construction Popeyes, which we marketed and sold very quickly relative to the current marketplace,” said Harf. “Driven by a purchaser’s 1031 exchange, we were able to strike while the iron kettle was hot and serve up a few spicy chicken sandwiches.”  The property features Popeyes’ newest prototype design and high-quality construction standards. Located in a dense retail corridor, the building has outstanding access and visibility from Highway 104 and 31 and Muskegon, Grand Rapids, and other surrounding areas. Neighboring tenants include The Home Depot, Walgreens, Dollar Tree, Starbucks, and more. The tenant operates on a long-term absolute net lease.