04.14.09 Medical RE Seen as 'Perfect Recession Play'

By Paul Bubny

NEW YORK CITY-Cash flow is king in healthcare-related properties but the asset class requires astute management, Noyack Medical Partners’ C.J. Follini told a Real Estate Lenders Association gathering Tuesday morning.

"Doctors need a lot of attention" as tenants, said Follini, managing principal of Noyack, a locally-based healthcare real estate investment and operating company. "It’s when they don’t receive that attention that you start to have trouble." With that said, Follini extolled health care real estate as a largely recession-proof oasis of stability and steady growth in a challenging climate.

The growth in the healthcare sector, expected to continue for the foreseeable future as the global population ages, is certainly a major factor in the strength of this asset class. Employment in physicians’ offices has grown 4.8% annually since 1972, compared to 1.8% annual growth in overall private employment, while the US population--ages 65 and over--is expected to more than double to 87 million by 2050.

However, Follini said much of the viability of medical-related real estate--which includes ambulatory surgery centers, specialty care facilities, medical malls, senior housing and parking facilities as well as medical office buildings--stems from the tenants themselves. They tend to renew leases at a higher rate than commercial tenants, he said, and as a result average estimated occupancy is expected to actually increase this year over 2007 and 2008 levels.

For investors looking to acquire medical-related properties, healthcare systems may be willing sellers for a variety of reasons, said Follini. For one thing, the systems are under pressure to monetize both their core and non-core businesses, and look to shed properties as a way to do so, often through sale-leasebacks. "Get rid of the real estate and bring on the cash," Follini said. Another reason for selling may be regulatory: healthcare providers are prohibited from self-referral by the Stark Laws in many states, and selling a multi-tenant medical office property removes the risk of running afoul of these laws.

To lenders who may be financing the purchase of healthcare properties, Follini advised ticking off a series of metrics. These include the property’s proximity to a hospital, the financial strength of the hospital, the quality of the tenants, the market rent delta, the quantity of available parking for physicians and their staff, the borrower’s equity and the borrower’s management experience.

As a case study in why "this asset class is a perfect recession play," as Follini put it, he cited his company’s purchase of a 28,000-square-foot medical office condo at One Hanson Pl., the former Williamsburgh Savings Bank building in Brooklyn. When Noyack made the $10.1-million buy last May, it was 75% occupied. Today, thanks to recent leases that stemmed from tenant referrals, occupancy has reached 100%.