Medical real estate still healthy

Today I spoke with Thomas Dalcolma, a partner with Street Sotheby's International Realty/Medical Realty Advisors, about the state of the medical real estate market. Dalcolma, who consults with physicians, medical group practices and hospitals, had some interesting information to share. Here's some excerpts from our conversation:

Q: How has the down market affected the medical real estate business?

A: [Actually,] healthcare is ramping up and will continue to ramp up--it's almost like grocery stores. A lot of it's not discretionary. Meanwhile, the boomers are coming to the doctor every week. But the big thing is that the investors figured it out. Medical is very complicated, but now investors don't have any other choice--retail's in the tank, office is very slow, multi-family has its ups and downs--and they're looking for a long-term safe investment. And a medical building with a long-term lease by a physician group or hospital system creates investment-grade real-estate.

Q: You say that doctors and hospitals are sitting on a gold mine with medical real estate. Tell me more?

A: We're selling occupied medical office buildings in the neighborhood of $200 per square foot, while a typical office building sells for $100 to $125 per square foot. 

Q: What factors contribute to a lease being of a high quality?

A: It's the quality of the lease that creates the value. The quality depends on the building's location, the credit-worthiness of the tenant and other factors. For example, if you have a hospital that's tenuous as far as their ability to continue, that wouldn't be attractive to an investor. But if the hospital is doing well and pays a good lease rate, it improves the value.

Q: You make it sound like leasing is a good idea.

A: It is. Hospitals can depreciate a building over 39 years if they own it, but if they sell it and lease it back they can depreciate it right away. Also, if they take the cash and put it into new markets, the return on investment is much, much higher. 

Q: Why aren't more hospitals doing this?

A: The savvy ones already are. Our biggest problem is educating other providers. They don't think of real estate like a business--it's kind of an offshoot. They need somebody who understands how to run a building.

Obviously, Dalcolma is super-bullish on medical real estate's prospects. How about you? Do you think hospitals and medical practices can turn their fortunes around by unloading their buildings? - Anne