The healthcare sector has risen within the net lease asset class over this past cycle. Tenants such as medical offices, dental practitioners, urgent care centers, and pharmacies among others prefer net lease as it allows for more control over facilities and operations. In parallel, landlords benefit from often credit-worthy, reliable tenants that provide a stable rental income stream in what many consider a “recession proof” industry.
Healthcare Benefiting Capital Markets
Single tenant net lease investors know the perks of signing with healthcare tenants. One major reason being their typical long-term leases as medical offices have strong longevity in the market. Their relatively stable demand provides not only security, but resilience, even during economic downturns and global pandemics. During 2021, transaction volumes in the U.S. for the medical office sector reached a record-breaking $14B. At the peak of Covid-19 in 2020, investments in medical offices accounted for 18% of overall office transactions.
Specifications for Medical Office
Site selection criteria for medical offices differ from other various tenancies due to their special needs and types of specific practice provided. However, our firm has seen some common attributes we are able to identify as advantages for tenants. There has been a rise in “medtail” sites, where medical users locate in retail heavy locations to provide convenient and accessible locations for their patients to navigate with ease. Furthermore, connection to major transportation and proximity to other medical facilities or hospitals are among other crucial factors we have come across.
Investors must check zoning compatibility prior to approaching healthcare tenants since medical offices follow a multitude of zoning regulations including requirements for parking and accessibility for the disabled. Additionally, there are different regulations for specific uses. For example, a medical office in Nashville requires 1 parking space per 200 square feet, but a drug treatment facility requires 1 parking space per 150 square feet.2 We like to emphasize these characteristics when marketing to potential healthcare tenants.
A Look at Healthcare’s Future
Medical offices look like they will only continue to grow in the net lease space. As our world progresses with technology, focusing on fast results and spread of knowledge, we can expect to see more properties such as urgent care facilities closer to patient populations. They are less volatile in the market, making them an attractive purchase for investors. Following the slowdown in transactions in 2023, healthcare providers such as urgent care practitioners and dental offices have shown strength among the market due to their sustained demand.
GlobeSt. reported dental offices are performing exceptionally well and experiencing four-basis point compression year-over-year. Whereas dialysis facilities have seen significant cap rate expansion, reaching 135 basis point year-over-year.3
Conclusion
Healthcare net lease properties continue to attract investors and offer an excellent way to enhance portfolio diversification. Individual investors will need to evaluate if medical office buildings will be suitable for their long-term financial goals since long leases may not provide opportunities for rental growth. The need for these facilities currently remains, but medical technology is changing with telemedicine and remote applications which can possibly affect part of the sector. It will be interesting to see what technology brings and develops for the healthcare sector.
We invite interested readers to consult with our experts to successfully navigate the dynamic sectors of net lease properties.
Our Firm
Winston Warren is your dedicated expert transforming real estate into revenue. Leveraging strategic investments and building enduring relationships for sustainable returns. Our team specializes in investment and net lease real estate solutions.
Sources: