May 2023 The healthcare sector is by no means immune to changing economic conditions, but among commercial real estate investors, medical facilities continue to be among the most popular and desirable investments. An aging U.S. population has driven demand for all types of healthcare properties – from more traditional medical office buildings, physicians’ offices and urgent care facilities, to highly specialized properties including behavioral health, post-acute care facilities and micro-hospitals. But as healthcare facilities become more specialized, we’ve seen buyers become more specialized as well. Healthcare Specialty Assets: Investment Sales Volume Some healthcare and medical investors see value in acquiring assets with high acuity uses and expensive finishes and build-outs. High revenue potential and replacement costs for these properties provide investors with certainty of continued use by the tenant. Other investors have become focused on properties leased to health systems and see an opportunity to foster relationships with their tenants for long-term success. Still other investor groups recognize that high construction costs have created opportunities to acquire value-add facilities, including second generation medical office buildings that are ripe for renovation or redevelopment. Regardless of an investor’s chosen lane of specialization, ever increasing demand from consumers will continue to drive the need for new healthcare facilities, creating more and more opportunities for investors to enter the sector or add to their existing portfolios. Healthcare development is occurring throughout the U.S., as consumer demand can be found across all regions and in markets of all sizes. Unsurprisingly, the state of Florida currently leads the nation in new healthcare development. With more than 21 percent of the population over age 65, demand from retirees and aging Americans are keeping developers busy. As these new developments come online, they’re capturing the attention of a variety of buyer groups. While REITs and institutional investors have historically been quite active in the sector, changing market dynamics have caused these buyers to become less competitive over time. The desire to acquire healthcare assets remains strong, but with more buyers now active in the sector, the available supply of properties is not enough to meet investor demand. Private equity funds, family trusts and individual investors have come to appreciate the stability and increasing demand forecasted for the sector, and REITs and institutions are simply being outbid by buyers with access to low-cost capital and a strong appetite for the product. As a result of this demand, we have seen the single-tenant healthcare sector grow in annual transaction volume, demonstrating a nearly 150 percent increase in the last ten years. Looking ahead, however, the gap between buyer and seller expectations will cause transaction volume to decline, and activity is expected to be suppressed for at least the next 12 months. The ability to sell at unprecedented pricing is likely a thing of the past and is no longer a primary motivation for owners. Instead, in the next 18 to 36 months, conditions motivating a sale should center around debt maturity and the need to refinance. In today’s environment, sellers will need to price their assets for today’s buyers or risk chasing the market, while buyers shouldn’t ignore good fundamentals. As buyers and sellers see-saw their way closer to alignment on pricing in the coming quarters, the market can expect to see activity resume, although the lack of supply could be problematic for some time given anticipated demand.

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. 

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.”

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.

Originally published by Wealth Management Investor interest in medical office properties registered a slowdown during the second half of 2022, but brokers and analysts say they expect a rebound this year as inflationary pressures ease and the Fed is expected to pull back on interest rate increases.  While investment sales figures for the fourth quarter of 2022 aren’t available yet, transactions in the sector have been trending down, according to the latest data from research firm Revista and real estate services firm Cushman & Wakefield.  In the third quarter, the market saw only $2.6 billion in investment sales involving medical office properties, excluding the merger of Healthcare Realty Trust and Healthcare Trust of America that was completed in July. That was the lowest volume since the first quarter of 2021, when only in $2.1 billion in properties traded hands. Investment sales in the medical office sector peaked at $7.3 billion in the fourth of 2021. Since then, they have been on a downward path each subsequent quarter.  Cap rates in the sector have also expanded over the past 12 months. They averaged 5.5 percent in the first quarter of 2022, but rose to 6.0 percent by the third quarter, according to Jacob Albers, research manager with Cushman & Wakefield.  “The impact of rising interest rates and inflationary pressures on medical office buildings and their expenses are having a cooling effect on what transaction volumes were at the end of 2022 and going into 2023 as well,” Albers says.  However, Albers calls this trend “temporary and recoverable” as inflation appears to cool down. In December, inflation in the U.S. declined for the six straight month, with an increase of 6.5 percent year-over-year and a 0.1 percent month-over-month decline.  In addition, the investment community remains broadly interested in investments in medical office because of the sector’s stability, according to Alan Pontius, senior vice president/national director of the office and industrial divisions with real estate services firm Marcus & Millichap.  “I expect the year to start off slow on a transactional level, but I expect it to pick up relatively soon as the year progresses because the market is adapting to the new underwriting standards with an interest rate environment that is different,” Pontius says.  The buy/sell gap  At the moment, the market isn’t as active as it has been because lot of sellers are slow to come to market if they don’t think they will get their desired price and buyers aren’t going to pay the same cap rates as they would have in a 3 percent interest rate environment, Pontius says. For example, class-A medical offices could have been selling at sub-5 percent cap rates at the peak, but today, it’s difficult to close transactions below cap rates of 6.0 to 6.5 percent because borrowing cost are unlikely to be below that, he notes.  “The only way you would have a cap rate below the cost of debt is if, for some reason, there was an immediate upside in the rental stream or possibly you have a long-term high-credit lease and an escalation schedule that will take you into positive leverage within the first year or two of that lease term.”  Still, there is broad interest in medical office assets across the investment spectrum, Pontius says. For deals valued above $20 million, the medical office REITs are the most prolific buyers. Private investors are more engaged in dealmaking if they find the right fit. Institutional investors, on the other hand, have been less active and are taking a more wait-and-see approach.  Albers says he’s seen more transactions involving private equity shops that are able to be nimbler in this economic environment. In addition, “We’ve seen more activity when it comes to smaller investors and HNWs that have less hoops to jump through and less committee review,” Albers said.  At the same time, he notes that because of the scarcity of available debt, the average value of stand-alone transactions has declined.  For his part, Lee Asher, vice chairman of healthcare and life sciences capital markets at real estate services firm CBRE, says his team is seeing a buyer pool comprised of groups who still have dry powder—portfolio managers looking to rebalance their portfolios away from traditional office properties and seasoned investors in healthcare real estate who are confident in the long-term stability of the sector. REITs, while still active, are struggling to rationalize paying prices that might view as too aggressive as they have seen their stocks dip and a corresponding increase in their cost of capital, Asher adds.  Who’s selling?  Sellers can be split into two different pools—maturity investors and business plan investors, Asher says. The first group is comprised of investors who face either a fund life maturity or debt maturity with unfavorable refinancing options. For the most part, investors with a maturing fund life are only selling if they have a low basis and have already created significant value for the property. Otherwise, they are choosing to hold, he notes.  The second group of sellers likely bought their properties before 2020, didn’t underwrite the cap rate compression that occurred after 2020 and so can achieve their business plan even under current interest rates, Asher says.  The bid-ask spread on medical office has widened significantly in the past nine months and it hasn’t yet closed enough to move the market, Asher says. There are a number of investor groups on the sideline waiting for more price discovery before they start to make deals.  The widespread belief among industry insiders is that the first half of 2023 will continue to be slow for medical office deals, but there will likely be a rebound in the second half of the year, says Shawn Janus, national director, healthcare services, with real estate services firm Colliers. Much of that optimism revolves around the Fed pausing on interest rate increases.  “Investors and developers in the sector make their living by investing in medical properties, so they continue to do so or want to do so,” Janus says. “Investments are also being looked at from a relationship perspective, with the hope that as the markets improve, those relationships will bear fruit in future deals.”  Investors that are able to be the most aggressive on deals today have access to a line of credit with spreads lower than those than what the banks are offering, or they are able to close on deals all-cash, says Asher. He points to vertically-integrated funds as the most active of these types of investors—they are viewing this as a buying opportunity while the institutions slow down.  There’s a backlog of investment managers looking to add to their portfolios, as well as new groups attempting to break into the healthcare real estate sector due to proven fundamentals and the recession-resistant attributes of the asset type, according to Asher.  “The majority of the established healthcare investors still have a pile of dry powder from the influx of capital over that last 18 months,” he says. “Portfolio managers and traditional office investors are looking for an alternative investment for their struggling office allocations.”  Expected returns  Returns on investments in medical office properties have tightened as expenses on NOI have risen across the board, particularly in higher cost markets. Leveraged IRRs on core medical office properties today are averaging from 7 to 9 percent, according to Brannan Knott, managing director, capital markets, with real estate services firm JLL. Leveraged IRRs on core plus assets are ranging from 9 to 13 percent and on value-add assets from 13 to 20 percent.  “Debt cost certainly are affecting near-term and overall returns in the sector,” Knott says. But “The price adjustments in transactions have helped bridge this return impact,” he adds.  But despite the current environment, Albers says the healthcare sector is in a good position because of rising demand for healthcare that should provide opportunities for investors. In 2022, healthcare spending has begun to rise again as patients continued to seek care that might have been deferred during the pandemic, he says.  “I feel volume will be down and pace will be slow for the first half of the year,” says Jeff Matulis, senior vice president with capital services provider Northmarq. “Eyes will continue to be on the Fed with what they are doing with rates. Employment is still strong and there is plenty of capital to be spent, both debt and equity. Anytime we see a glimpse of inflation calming, the stock market lights up and treasuries drop.  I think this gives us an idea of what is waiting on the backside of all this when the Fed stops their rate hikes.” 

Northmarq’s Isaiah Harf, managing director, completed the sale of a multi-tenant healthcare property located at 1830 North Richmond Road in McHenry, Illinois. The brand new, 7,000-square-foot building is 100 percent occupied by Aspen Dental and WellNow Urgent Care. Harf represented the seller, a Chicago-based developer. A Missouri-based 1031 exchange private buyer acquired the asset for approximately $4.7 million.  “Upon marketing commencing we were able to find a 1031 exchange buyer within the first few days who had tremendous familiarity with Aspen Dental and was willing to pay near asking price for the asset,” said Harf. “While inquiry from the market remained high for the asset all the way to the end, we were able to close this asset with our first buyer smoothly and without hiccup.”  As medical and healthcare tenants are in strong demand, this built-to-suit supports one of the largest and fastest-growing dental service providers in the United States, Aspen Dental. The WellNow Urgent Care, a wholly owned subsidiary of Aspen Dental, benefits from the rise in demand for quick, affordable care. Roughly 50 miles from downtown Chicago, the property is situated on approximately 0.76 acres with excellent access and visibility from North Richmond Road. Surrounded by a major retail corridor, neighboring national retailers include Walmart, Home Depot, Meijer, JCPenney, Dick’s Sporting Goods and more. 

Excerpt of article originally published by Commercial Property Executive Northmarq has completed its acquisition of Stan Johnson Co., a purchase that also includes Four Pillars Capital Markets, a debt/equity intermediary for CRE assets.  Founded in 1985 by its namesake, SJC has grown to become a leading middle-market net-lease investment sales brand and a top 10 U.S. middle-market firm. The company reportedly has seen an approximately 600 percent increase in revenue since 2005.  In recent years, SJC acquired Shane Investment Property Group to help support a growing multi-tenant retail focus, entered the self storage sector, and launched Four Pillars Capital Markets, which secured about $500 million in loan volume during its first year.  FPCM is a key component of the acquisition, according to Northmarq, given FPCM’s alignment with Northmarq’s established debt/equity financing team.  An SJC spokesperson told Commercial Property Executive, “Stan Johnson will remain with the company for several months to aid in the transition.”  Plans for the acquisition had been announced at the beginning of September. Industry experts at that time gave the deal a thumbs-up, indicating that the expanded Northmarq would have a stronger end-to-end investment sales platform and that SJC was not likely to break into the top tier of the net lease investment sales market on its own.  Houlihan Lokey served SJC as its exclusive financial advisor in the deal, with Bass, Berry & Sims PLC providing legal advisory services.  With the addition of SJC and FPCM to its existing multifamily sales platform, Northmarq will now offer services across all major property types, including office, health care, industrial, retail, self storage and multifamily.  The acquisition of the two firms means that Northmarq will now have almost 1,000 professionals across its investment sales, debt/equity financing, loan servicing and fund management operations. The expanded company annually transacts $23 billion in debt/equity volume and $15 billion in investment sales volume and services a commercial loan portfolio in excess of $76 billion. 

The merger provides clients with increased opportunities within all domestic commercial real estate markets  Northmarq, a leader in commercial real estate capital markets, announced today the completion of its acquisition of Stan Johnson Company (SJC), a real estate brokerage and advisory firm that focuses on investment sales across multiple asset classes. The acquisition also includes the purchase of Four Pillars Capital Markets (FPCM), a debt/equity intermediary for commercial real estate assets.  With the addition of SJC and FPCM to its existing multifamily sales platform, Northmarq will now offer services across all major property types, including office, healthcare, industrial, retail, self-storage, multifamily and more.  The acquisition of these two firms means Northmarq will now have nearly 1,000 professionals across its investment sales, debt/equity financing, loan servicing and fund management operations. The expanded company transacts $23 billion in debt/equity volume and $15 billion in investment sales volume annually, and services a commercial loan portfolio in excess of $76 billion.  “The closing of this transaction ushers in a new era for our clients and employees,” said Jeffrey Weidell, chief executive officer at Northmarq. “We’re incredibly pleased with the growth our company has experienced since entering the investment sales space in 2018 and we look forward to continuing that momentum in the years to come.”  Stan Johnson Company was established in 1985 by its namesake founder and has grown to become the #1 middle market net lease investment sales brand and a top 10 U.S. middle market firm. The company has experienced significant growth leading to an approximately 600 percent increase in revenue since 2005.  “Our valued clients have been a singular focus since day one, and they have propelled our growth and diversification during these past few years,” said Stan Johnson, SJC founder. “As we join Northmarq, our clients will continue to receive the same level of superior service they’ve come to expect, while also benefiting from an expanded geographic reach and enhanced service offerings.”  In recent years, SJC acquired Shane Investment Property Group to help support a growing multi-tenant retail focus, successfully entered the self-storage sector and launched FPCM, which secured approximately $500 million in loan volume during its first year. FPCM is a key component of the acquisition given its alignment with Northmarq’s established debt/equity financing team. Houlihan Lokey (NYSE: HLI) served SJC as its exclusive financial advisor, with Bass, Berry & Sims PLC providing legal advisory services.  “This transaction brings together our shared vision and values in a way that helps us better serve our clients’ needs,” said Travis Krueger, chief operating officer at Northmarq.  Northmarq, purchased by the Pohlad Companies in 1999, has grown steadily through a series of acquisitions. From its roots as a life company correspondent, Northmarq has added its complete agency and HUD business, new fund management and investment sales coast-to-coast.  Northmarq’s expansion into investment sales began in 2018 with just a handful of offices focused on multifamily properties. Leading up to the SJC acquisition, Northmarq had grown to 22 investment sales offices in 13 states, with plans to continue expanding this service into every market where it offers debt, equity and loan servicing. 

Originally published by Wealth Management Rising interest rates and the threat of an economic downturn have slowed real estate investment sales across the board, including in the medical office sector. But the decline in sales of medical office assets is not as deep as it has been in other sectors and the market is well-positioned to weather the latest down cycle, according to brokers.  Third quarter sales volumes for medical office from data firm MSCI Real Assets aren’t available yet, but the numbers are expected to be down from the $7.3 billion recorded in the first half of 2022. That total was up from the $5.6 billion in the first half of 2021, and higher than the $6.8 billion average recorded between 2017 and 2019.  The medical office sector “isn’t immune” to what’s happening in the broader market, according to Shawn Janus, national director, healthcare services, at real estate services firm Colliers. But healthcare is considered recession-resistant and as such isn’t impacted to the same extent as other sectors, he adds.  “We've begun to hear about some deals being delayed, as well as some re-trades,” Janus says. “The healthcare sector is still seeing capital formation seeking investment in the asset class. The belief is that healthcare will be less impacted than other asset classes and will stabilize sooner as well.”  Buyers of healthcare-related properties are adjusting to the same rising interest rates as buyers of other asset types, says Toby Scrivner, a senior vice president and healthcare specialist at the brokerage firm Stan Johnson Company which is now a part of Northmarq. Because of the increased cost of debt, many buyers are sitting on the sidelines for now, looking for yields and sale prices that are more reflective of this new paradigm in the marketplace. That has slowed down the sale process, he notes.  “That said, healthcare real estate is not experiencing the same slowdown as other product types,” Scrivner says. “This is largely attributed to the limited amount of healthcare products coming to the market annually and the ever-increasing number of investors who want to invest in this sector. There is still supply and demand inequality in the market. While there have been cap rate adjustments for some assets coming to the market, there are still assets going under contract at pre-rate hike cap rates.”  Medical office is going to be more insulated than traditional office buildings from the trends in the larger marketplace because of its “recession-resistant nature,” says Travis Ives, co-leader of Cushman & Wakefield’s U.S. healthcare capital markets team. The sector has historically had higher tenant retention and rent collection. The one drawback is it can’t quickly recoup the costs of inflation, like multifamily, for example, which typically has annual lease renewals, Ives notes.  Cushman & Wakefield’s healthcare team has been hearing from its colleagues across the firm network for two or three months about the challenges they were facing in the office sector, and “we wondered when that was going to filter through to our product type, because we were not feeling it at the time,” he says. By now, however, it has become clear the increase in capital costs has hit demand for medical office sales and impacted property values. But the impact has been muted compared to the office sector.  Data on where the market is at right now is lagging because deals closing over the last few months were likely marketed and closed in the first half of the year, prior to conditions getting more challenging, Ives notes. That’s when investors pulled back and prices started to adjust.  “We’re not seeing in the stats yet a significant increase in cap rates, but we think there’s an adjustment coming,” he says. “We know firsthand from deals we’ve been working on that buyers have pulled back and lenders are more conservative.”  Nevertheless, the medical office sector is still considered a favored asset class among investors, according to Al Pontius, a senior vice president and national director for office, industrial and healthcare for real estate services firm Marcus & Millichap. Investors are attracted to the stability of medical office tenants, supply and demand fundamentals and demographic pressure on increasing medical services, he says, echoing other specialists.  “That being said, though, interest rates are up, borrowing costs are up 250 basis points from where they were only nine months ago,” Pontius notes. “You will not in a condition like that maintain the same kind of pricing. Cap rates are up across the product spectrum. They are up 50 to as much as 150 points—depending on the composition of the deal. That’s less of a rise in cap rates than a corresponding rise in borrowing costs.”  All of that has slowed sales activity in the short terms as buyers and sellers adjust to a new market, Pontius says. When conditions change as fast as they did this year, the bid/ask gaps that opens rapidly means prospective sellers aren’t as prepared to adjust to lower pricing than they would be under different conditions. Buyers, meanwhile, are waiting for price adjustments.  Marcus & Millichap is still working on a number of medical office transactions that are in motions right now and new investors continue to enter the sector, according to Pontius, “but there’s a number of considerations to making a deal right this minute.”  “It takes a level of seller understanding of the impact on pricing, and it takes buyers who are continuing to execute on their strategy for being involved in the medical office sector.”  Pricing expectations  Generally, cap rates on medical office transactions have risen in the range of 50 basis points, but the increases are market-, sponsorship- and location-specific, according to Janus. Assets that are located on-campus of larger medical office complexes have held up better and have seen only modest cap rate increases. For a while, there was a mismatch between sellers lamenting that they may have missed selling at market highs and what buyers were willing to pay, but that gap appears to have narrowed recently, he adds.  Scrivner says Stan Johnson is compiling sales transaction data that will show an “on average’ increase in cap rates of 30 to 40 basis points over the first and second quarter of the year. It’s difficult to set appropriate sale price expectations for a seller when the potential for a motivated 1031 buyer to enter the market and buy a property at yesterday’s pricing is a real possibility, he notes.  “We advise buyers that while the possibility of achieving yesterday’s pricing exists, hoping is a luck strategy,” Scrivner says. “If there is a real motivation to sell, deals should be priced to attract the broadest pool of sophisticated healthcare investors. This business strategy will ensure a competitive bidding process and the best surety of sale execution.”  There’s also an “interesting dynamic” with sellers of better properties holding onto them or not doing a deal if they fail to get the target price, according to Ives. They would rather own it than sell it at a discount and are under no urgency to do so, he adds.  “You don’t see an adjustment in those values because those deals didn’t trade,” Ives says. “But what you will see in the stats that show up are some of the more challenging projects that had some hair on them and a seller that had some urgency where they needed to sell and were willing to adjust their value expectation to get the deal done. That’s where we are going to see the adjustment in cap rates reported, but it could be misleading because it might not be indicative of where core-plus pricing would have been.”  Many of the buyers in contract over the last couple of months had locked in rates or had secured lines of credit and weren’t exposed to the volatility in the debt market, according to Gino Lollio, co-leader of Cushman & Wakefield’s U.S. healthcare capital markets team. That has since changed, he adds.  Financing  Financing for medical office acquisitions continues to be available, but underwriting has become more stringent, brokers say.  Healthcare has always been an attractive sector for lenders who love it for the same reasons that investors do—stability, demographic trends that boosts demand and resistance to recessions, says Scrivner. Lenders still want to make loans on healthcare real estate, but the debt terms that banks are willing to make will vary based on the project, the property use, the size, or affiliation with a healthcare system, he adds.  “Rest assured though, if there is healthcare real estate involved there are lenders eager to be involved.”  However, as debt has become more expensive, lenders aren’t as willing to provide debt on large portfolios, says Ives. Many big national banks “have put their pencils down,” and that means reaching deeper into the debt pool of local or regional banks who aren’t willing or able to finance such large acquisitions.  “There were a lot of big portfolios on the market the last six months that did not transact and got pulled, and they will probably come back out eventually,” Ives says. “They certainly did not hit their values.”  In response to higher interest rates, buyers have turned to all-cash transactions or lower leverage—for example, 50 percent vs. 65 or 70 percent previously, according to Pontius. This helps structure more economically sound deals. But even the all-cash and lower-leveraged investors are cognizant that the interest rate environment has pushed cap rates upward, he adds.  Buyer groups  During the first half of 2022, private buyers made up 54 percent of investors in medical office properties, followed by institutional funds at 24 percent and REITs at 15 percent, according to MSCI Real Assets.  Private equity groups continue to acquire medical office properties, provided they get the right terms, while REITs have been less active because of dividend yield constraints, says Janus. End-users are looking closely at lease versus own strategies, given their thin operating margins and the changing macro environment that has impacted them. All-cash buyers have a leg-up on competitors who rely on leverage, given the rising interest rate environment, he adds.  Generally, private investors are more active in the sector at this time and more expansive in their criteria than institutional investors whose acquisition criteria are tighter, notes Pontius.  Meanwhile, while some sellers are opting to stay on the sidelines, others are coming to the market anticipating interest rates will continue to rise and that it might be better to sell now than in 2023, he adds.  “Then others have event-based decision making,” he adds. “If I have a loan coming due in six to nine months, and I don’t like the interest rate market from a refinance, then that’s an asset that may come to the market because of that.”  Overall, however, “it feels like a wait-and-see mentality right now,” says Ives. “We’ve been putting this in a lot of our pitches to sellers in what’s going on in real time. If you are not in desperate need to deploy capital, you’re willing to sit back and hopefully see some kind of adjustment and opportunistically come back into the market at a lower value. If you are a seller that doesn’t need to sell, you’re hanging onto it. If you’re a seller that needs to sell over 12 to 24 months, the general sentiment is you’re better off going now rather than later.”  There are still opportunities  As conditions shift and push up yields, it has allowed certain funds that have historically had higher yield thresholds and were previously priced out to enter back into the marketplace, notes Cushman & Wakefield’s Lollio.  Scrivner says that while his team has seen buyers taking a step back, they have tended to be the funds and REITs focused on the healthcare sector. For them, it’s an opportunity to let the market cool and wait for sellers to adjust pricing expectations. For private buyers dependent on bank financing a higher purchase cap rate is required to achieve positive leverage, he says. However, that’s a sound strategy until you introduce the elements of private buyers with tax avoidance motivations, a popular asset class and a very limited supply of product.  “We estimate it will be six to nine months for the market to level out and close the gap between the expectations of the focused healthcare buyers and those of sellers seeking to achieve the record pricing of sale comps that closed in the first half of 2022,” Scrivner says. “During this time, I expect to continue to see certain types of deals that will generate strong interest and will subsequently trade at aggressive cap rates on par with 2021 and the first half 2022... Other deals will not garner the same level of interest and will ultimately trade at pricing more reflective of where the broader market is willing to buy investments in today’s environment.”  If inflation starts leveling off and a recession hits, the medical office sector will likely be sought out for its stability of cash flow, says Ives. He’s hearing from some people that the debt markets might become more liquid in January. Even though the rates will be higher and that will make transactions easier to get done, there will need to be some adjustments in values for people to step back, he adds.  “It would be the right investment to hide out for a while,” Ives says. “We call it a safe harbor where capital has sold something and is looking for a place to deploy with plans to be there for three to five years. It wants to know the cash flow they are buying is going to be sustainable.”   

Northmarq, one of commercial real estate’s leading investment sales brokerage firms, has completed the sale of a four-star skilled nursing facility located at 13960 Plantation Road in Fort Myers, Florida. The 57,650-square-foot building is fully leased to Lee Memorial Health, a Southwest Florida community-owned health system. The seller was a Florida-based developer. Northmarq’s Jason Maier represented the 1031 exchange buyer, a private investor based in New York. The asset was acquired for $46.7 million.   “We are excited to have been a part of this dynamic transaction. Fort Myers has been a strong growing market in Florida and has undergone a very rapid expansion in recent years. Lee Memorial is by far the dominant and most prestigious hospital in the area with an unbelievable management and executive team,” said Maier, Senior Director in Northmarq’s New York office. “We believe the acquisition of this state-of-the-art facility will provide our client with both long-term stable income and huge upside appreciation through rental rate growth and land value appreciation.”  The facility was built in 2018 and is situated on 4.28 acres in a southern suburb of Fort Myers on Florida’s west coast. The property is strategically located in the Gulf Coast Medical Park and is situated on the Lee Memorial Hospital Main Campus with direct access to the emergency room and main hospital building via a reciprocal access agreement. The building serves as a long-term acute care, inpatient, and outpatient facility serving Lee Memorial patients. The Gulf Coast Medical Center houses a trauma center and neuroscience institute, as well as orthopedic, oncology and cardiology services. The property was under a long-term triple net lease at the time of sale, with strong annual increases and is guaranteed by Lee Memorial Health Systems.  

We are excited to announce that industry news leader, GlobeSt.com, has named Ryan Butler, Senior Vice President & Managing Director, as a Net Lease Influencer for 2022. Ryan has a deep track record across the net lease sector, and with more than two decades of experience, he has made a consistent impact and significant contributions to the industry. Please join us in congratulating Ryan on this outstanding nomination!  Net Lease Influencers 2022 Excerpt of article originally published by GlobeSt Net lease has always been a stable asset class, attracting investors intrigued by its regular cash flow and strong fundamentals. Now it is wobbling a bit as the economic uncertainty clouds pricing but few believe that will last long. Still, it is times like these that require the best of the best to navigate the space and we are confident we have picked that crew in our 2022 net lease influencers. We hope you enjoy their stories as much as we did as we made our selections.   Ryan Butler Known for finding deals and solving problems, Ryan Butler is focused on helping clients acquire and divest net lease assets across the retail, industrial, office and healthcare sectors as Senior Vice President & Managing Director at Northmarq. Butler’s 22 years of experience have helped him develop deep relationships in the net lease arena. During his career, he has closed $2.55 billion in sales, and in the past three years, he has sold more than $1.1 billion of investment properties across nearly 200 individual transactions. In recent months, Butler notably achieved record-low cap rates for a BJ’s Wholesale Club in Massachusetts and a McDonald’s restaurant that sold in Texas. In addition, he brokered the sale of three single-tenant retail portfolios for a combined $75.5 million. Butler’s production volume made him eligible to be inducted into the firm’s inaugural class of partners in 2020, an opportunity offered to Northmarq’s top sales producers that recognizes outstanding contributions and commitment to providing extraordinary service to clients. Butler serves as a thought-leader in the industry by frequently contributing to whitepapers and providing expertise on net lease for media outlets.  Reprinted and excerpted with permission © 2022 ALM Global Properties, LLC. All rights reserved. 

Across the single-tenant marketplace, office and industrial are currently the dominant property sectors in terms of sales volume contribution. With healthcare – a subset of the office sector – playing such an essential role in recent years, along with continued red-hot demand for industrial and logistics space, these sectors have combined to contribute approximately 80 percent of single-tenant property sales volume each quarter for the past four years. This percentage is up from 67 percent just a decade ago. Within the industrial market alone, we’ve seen transaction volume increase from 35 percent of the overall market in 2012 to 52 percent year-to-date 2022, illustrating a significant shift in buyer demand. Single-Tenant Office Sees Spotty Rejuvenation Post-Pandemic The single-tenant office sector had an impressive start to the year in 2022. The sector posted more than $8.0 billion in investment sales activity, securing first quarter 2022’s place as the fourth strongest quarter on record. In fact, post-pandemic activity for the office market has led to three of the top-five performing quarters in history. Despite the recent momentum, it wasn’t able to carry over into second quarter 2022, when just $3.8 billion in transactions were logged. Quarter-to-quarter, this represents a 53.1 percent drop in activity, and it’s also the lowest level of sales volume reported since the height of the pandemic. As is typical, the quarter was dotted with several higher priced transactions including the $205.5 million sale of the former Xerox facility in El Segundo, California, as well as AT&T’s corporate office in the Buckhead submarket of Atlanta that sold for $137 million. However, the highest profile transaction of the quarter was the four-property Meta campus in Silicon Valley that traded for nearly $707 million. Overall transaction count was down, but the vast majority of activity for the quarter involved smaller transactions, primarily under $25 million, with numerous sales falling below the $10-million mark. While this trend isn’t necessarily unusual, especially in the single-tenant sector where many office properties are of smaller size and price point, there was a noticeable absence of larger portfolio closings that have been prevalent in recent quarters.  Without these substantial transactions, overall sales activity naturally falls, but it doesn’t necessarily indicate a reduction in buyer demand for the sector. In just the first half of this year, private investors have taken market share away from REITs and institutional investors by being very active in the small deal space. If we study the historic dominant players for single-tenant office properties along the spectrum – from small freestanding facilities to massive corporate offices and campuses – the reduction in sales volume doesn’t feel so surprising. Could Second Quarter Activity Indicate an Industrial Slow Down? Industry experts have been suggesting for months that a slowdown is looming for the industrial sector. A number of headwinds continue to impact the market, and investment sales activity in the first half of 2022 has indeed witnessed a decline from recent record-setting periods. In second quarter 2022, the single-tenant industrial sector reported $8.4 billion in transaction volume. This was down 32.2 percent from first quarter 2022, when approximately $12.4 billion in sales were reported. When compared to the astronomically high activity reported at year-end 2021, and studying the $52-billion year as a whole, the industrial sector looks to be significantly off-pace midway through 2022. However, strip out just fourth quarter 2021, and the market is actually performing equal to the five-year trailing quarterly average and outpacing the 10-year average. Current activity appears to be right-sizing, returning to levels more in-line with a hot, but not overly frothy, market. Additionally, if investment activity doesn’t decline further in the second half of the year, 2022 could easily become the second strongest year on record. As tenants grapple with increasing rents and low vacancy, investors are watching interest rates and inflation, trying to make deals make sense. Part of today’s pullback in sales volume is likely influenced by the repricing of deals as buyers are no longer able to lock in debt at yesterday’s costs. However, with demand still very high and new supply lagging, there is no shortage of bidders on most of today’s offerings. To download a copy of this report, please provide the following information: hbspt.forms.create({ region: "na1", portalId: "7279330", formId: "e0a86c38-f147-4bd4-8dba-8b92e71fa857" });