Western Real Estate Business

MAY 2018

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

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42 • May 2018 • Western Real Estate Business www.REBusinessOnline.com OC'S MOB MARKET HAS RETAIL ROOTS Investors are still clamoring for medical office buildings in Southern California, particularly in Orange County where space near major retail establishments can mean big business. By Nellie Day A few key trends have assured the viability of healthcare real es- tate, at least in the eyes of many investors. These trends include the aging Baby Boomer population, the nationwide focus on health and well- ness, and the younger generations' proclivity for preventative care and maintenance before any major health blips even hit their radars. The U.S. healthcare sector has ex- perienced nearly a decade of steady employment and investment growth, according to Cushman & Wakefield's Vital Signs report. Healthcare vacancy rates continue to decline, hitting a low of 7.7 percent in the third quarter of 2017, the report notes. This was down significantly from a peak of 10.6 per- cent in 2010, representing a 60 basis point drop from the third quarter of 2016. Direct vacancy was even lower at 7.5 percent, and has now spent 13 straight quarters below the 10-year average of 9.5 percent. A tight inventory combined with motivated investors pushed cap rates to historic lows near 5 percent. Though Lorie Damon, managing director and leader of Cushman & Wakefield's Healthcare Advisory Group, believes some challenges exist, she also pre- dicts the demand for medical office building (MOB) investments will con- tinue, as it far outweighs the current supply. "In many respects, 2017 was a record-breaking year, but the im- plications for healthcare real estate investors and developers remain uncertain," she says, referring to a challenging regulatory and reim- bursement landscape, in addition to a few operating issues faced by many of today's current MOB tenants. "In- vestor appetite for these assets con- tinues to achieve record levels, and pricing for investment-grade assets remains the highest ever seen in this sector." California's MOB Mentality California has been a particular bright spot for MOB investors. The state accounted for 56 percent of the total MOB investment for the region, according to CBRE's first-ever U.S. MOB report, published this past Au- gust. The report further notes that if California were its own region, it would have experienced the fifth- largest amount of medical office in- vestment since 2009 at $6.4 billion. Orange County, in particular, has experienced an MOB rent growth of 9 percent or more since 2010, repre- senting some of the highest growth rates in the country. This also locks Orange County in as the No. 8 market for highest U.S. medical office rents, CBRE notes. "Southern California is a very ex- pensive market for healthcare pro- viders regarding their real estate oc- cupancy costs," says Bryan Lewitt, Southern California practice leader for CBRE's Healthcare Services Group and senior vice president. "This region is extremely under-built when it comes to healthcare real es- tate. During this last economic recov- ery, half of the potential healthcare properties were converted to non- healthcare uses." Demand for OC healthcare real es- tate has grown ever greater as more hospitals and larger integrated health systems opt to situate non-emergency services off-campus. Nowadays, ev- erything from urgent cares to lab tests, dialysis, outpatient plastic surgery, dermatology, podiatry, ophthalmolo- gy and weight management is tackled in MOBs conveniently situated within a community. One community ameni- ty MOB investors are looking to cash in on is residents' fondness for retail centers, as two recent Orange County deals highlight. Simon Says Orange County is a market eagerly awaiting additional MOB opportuni- ties, though many investors and de- velopers are focusing on the nearby "non-healthcare uses" that can actu- ally benefit their projects. This in- cludes Welltower, which will shortly commence construction on Mission Viejo Medical Center (MVMC), a 104,500-square-foot medical office building in the Mission Viejo submar- ket. The fully approved, Class A proj- ect will be situated on the southeast parking field of the Shops at Mission Viejo, a Simon-owned super regional mall that's just steps from Providence St. Joseph's Mission Hospital. Welltower agreed to purchase de- veloper NCA Real Estate's interest, as well as provide equity and debt capital to the new partnership. NCA concep- tualized MVMC more than eight years ago when it began negotiations to ac- quire the underutilized portion of the mall site. It was at that time that NCA recognized the synergies between re- tail and medical office projects. MVMC is anticipated to bring sub- stantial economic benefit to the mall from the patients and employees who will be brought to the mall each day, while the Shops at Mission Viejo will serve as a strong amenity for MVMC. Upon its 2019 completion, this project will be the first on-campus MOB con- structed in South Orange County in more than 10 years. MVMC will be completely occupied by Mission Hospital and will include a comprehensive cancer center, medi- cal imaging suite and endoscopy cen- ter, among other outpatient services. Though the deal for an MOB project eight years in the making wasn't al- ways easy, Evan Kovac, managing director at HFF who, along with An- drew Milne and Trent Jemmett, rep- resented NCA in the transaction, be- lieves the investment will prove to be worth the wait. "NCA and Welltower worked dili- gently throughout the complicated process, often under compressed timeframes, to see this deal come to fruition," he says. "Once completed, MVMC will be one of the pre-emi- nent on-campus MOBs in the United States." Acquiring Adjacent 'Shop' Space MOB rents in Orange County are nothing to sneeze at, particularly with that 9 percent increase. CBRE notes that these rents now come in just be- low $30 per square foot on average in the county. The region also expe- rienced a 21.5 percent increase in its 65-and-older population between 2011 and 2016, priming Orange Coun- ty for continued healthcare demand. "Some of the nation's top healthcare players have their highest-grossing facilities located here in Southern California," Lewitt says. "Therefore, higher lease rates, construction costs and building prices are just some of the factors of doing business here. De- mand from providers and the invest- ment community alike will only con- tinue to grow." The Laguna, a 57,057-square-foot medical office building, is situated across from Laguna Hills Mall. The asset is undergoing a transformation into an indoor-outdoor retail center and urban village called Five Lagunas. credit HGA Architects Welltower will soon begin construction on Mission Viejo Medical Center, a 104,500-square-foot medical office building in Mission Viejo. The project will be situated on the southeast parking field of the Shops at Mission Viejo, a Simon-owned super regional mall.

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