Industry News Blog

There are still many unknowns in terms of the impact that the Affordable Care Act of 2010 will have on healthcare reform. But medical real estate has bounced back and is now approaching pre-recession levels.

The consensus is that hospitals will continue to employ or joint venture with private practitioners as they have over the past several years. This trend has helped hospitals increase admissions and allowed physicians to focus more on their patients rather than operating their private practice while reimbursements continue to decline. 

This trend has and will continue to impact healthcare real estate. An increasing number of real estate transactions are executed on the hospital’s balance sheet since more and more physicians are employees of a hospital. This has been a positive for this sector since the creditworthiness of the physician has been replaced with the financial strength of the hospital. In addition, as physicians become more comfortable with this shift from private practice to employee they are signing longer term leases. This tends to lower long-term vacancy and increase valuations of medical assets.

The long-term impact of healthcare reform remains an unknown. Reimbursement and compensation remain key concerns. This will continue to put pressure on physicians and hospitals to be more efficient and look for ways to cut expenses. This will surely impact medical real estate in the long-term and how providers view their real estate needs.

By Rob Schick, rschick@revelunderwood.com

Think Strategy not just Growth – while growing a business is beneficial in many ways including potential cost savings/economies of scale, more profit, ability to enter new markets, attract better staff think about how to get there versus just the end goal. In other words make sure you are putting in place all the strategies such as solid marketing plan, quality staff, product delivery systems etc needed as a base to grow your business. Focus on the process and the growth will stem from that rather than picking an arbitrary end number and just hoping to get there.

Don’t confuse your strengths with providing a competitive advantage. While in any facet of life and especially business it is important to play on your strengths and use them to guide your core business. But because you have strengths in certain areas it does not mean you have competitive advantage. Most companies with similar strengths will be seen as comparable to your customers/investors therefore continue to look to do something different than your competition to set you apart.

Budget time has arrived again.  While it seems to be everyone's least favorite task it is a perfect opportunity to review your business as a whole in todays environment and really evaluate your costs.  Here are a couple things to consider:

1. Start the process early.  This will allow you to have time to gather information both internally but more importantly from outside sources.

2. Get competitive pricing even if you are happy with your current vendors.  It's important to make sure they are being competitive in the pricing they give you and not taking advantage of an existing relationship.

3. Look at all costs and remember the little cuts can add up. How frustrating is it to hear our elected officials say things like, oh that only cuts $100 million, so it's not worth the effort.  However, if you find a few savings here and there, whether hundreds or thousands of dollars, it's worth the effort in any budget.

Good luck and remember that sense of relief when budgets are complete!

By Rory Underwood

The Federal Government is trying to calm fears over new debt rating and promised low rates for several years.  Even Warren Buffet indicated this was a promise that had little ability to be enforced and would more likely be dictated by the market forces.  The fact is that rates are low and that means cap rates are low if an opportunity comes in to sell, or refinance.  Now may be the best time to capitalize on the financial markets.
 

Medical office is the darling of commercial real estate today. As a result, we anticipate the development of medical office and outpatient surgery centers to swell in the next 3 – 5 years. 

There are a number of reasons why medical office is doing very well and why it will continue to in the foreseeable future. First and foremost 7,000 baby boomers will celebrate their 65^th birthday each day in 2011 and 3 to 4 million will each year through 2030. This along with the ever increasing number of people covered by health insurance means more doctor visits and ultimately more outpatient procedures. Secondly, medical office leases tend to be long-term (7 + years) with consistent rent bumps and are almost universally triple net leases. This all adds up to an unprecedented level of interest from investors and an overwhelming approval by lenders to fund these deals.

Nationwide cap rates declined an average of 60 basis points to 7.9% through the second quarter of 2011 from the same period in 2010 indicating that demand is beginning to overtake supply. This will mark a shift in increased development of medical office as the fundamentals are in place to absorb the additional square feet, i.e. 7.9 million square feet will be added in 2011 and its projected that 10 million square feet will be absorbed thereby decreasing the existing vacancy rate of all existing medical office. This fact alone will keep investors developing and acquiring more product and lenders funding these transactions.

Seven Tips for a Healthy Website:

1) Make links to your properties or business segments easy to use.  One click versus cumbersome searches.

2) Have your site highlight your specialties.

3) Visible Contact Information

4) Eliminate unnecessary links or outdated information

5) Include Social Media Tools

6) Highlight a Niche Market or Trend in your business

7) Offline promotion - make sure through ads, business cards, etc. that you drive traffic to your site
 

The anticipated debt downgrade of U.S. debt by S and P occurred after market close last Friday. The result, opposite to what some expected, was no forced selling of U.S. treasuries (the opposite occurred) and renewed potential for an increased period of low interest rates. As of right now, the 10 year treasury yield is 2.080%, down from 2.600% exactly one week ago. Investor psychology is having far more of an impact on the markets than actual fundamentals right now and, until this changes, any major rate increase in the short term isn’t a risk.  (Piedmont Capital Market Update Email, August 10th, 2011)

1. “Between” – a range of prices always ends up on lower end.
2. “We’re Close” – gives impression more interested in getting done than negotiating.
3. “Why don’t you throw out a number” – surprisingly the initial number quoted is where final number usually ends up closest to so contrary to popular belief going first is an advantage.
4. “I’m the final decision maker” – always leave room that someone else needs to be consulted before decision is made.
5. “Scr…You” – don’t negotiate from emotion stay calm and don’t take it personally.

Good Luck!  (Inc Magazine)

It's widely known that credit has become increasingly more difficult to obtain for the acquisition of self storage facilities. Underwriting standards have risen, loan to values have fallen and the number of sources actively lending is smaller than it was several years ago. The good news is that rates are very attractive, the number of active lenders is actually increasing and self storage is now eligible for SBA financing which will certainly increase the volume of transactions in 2011.

There are distinct advantages with an SBA loan vs. conventional financing. First and foremost is a higher loan to value with a typical range of 75% to 90%. Secondly, all SBA loans are fully amortizing with no balloon payments or call provisions and the SBA 7a program will allow an amortization of up to 25 years.

As with any financing option there are also drawbacks.  First, this program is designed for "owner- operators" not for a "passive" investor with third party management.  SBA doesn't specifically preclude a facility from being managed by a third party but it would be much more difficult to be approved.  Also, the SBA is designed primarily for the acquisition or refinance of existing self storage facilities as opposed to the development of a new property so true ground-up construction loans through the SBA would be very difficult to obtain.

What has always been referred to as a recession proof industry, self storage should now be considered as recession resistant. Self storage has always fared well in good times and bad and has always had the honor of having the lowest default rate of any sector of commercial real estate. This recession has been a challenge for every industry and every form of real estate. Self storage hasn't been exempt this time around and has experienced some declines in occupancy and value. However, not to the extent other commercial real estate sectors have, in particular office and retail which are both closely tied to employment levels, consumer confidence, etc.

While occupancies have dropped a little it appears they have stabilized over the past year. Transaction volume for the sale of existing facilities is considerably less today than what it was as recently as four or five years ago but not due to a lack of buyers. Demand for existing facilities exceeds the supply but we're seeing inventory rising as buyers and sellers are getting closer to equilibrium on current pricing. Cap rates are up from historic all time lows in early 2007 but they too have stabilized over the past six months. Combined, these factors tell us we may be at or near the bottom of the market.

Never in recent history has the task of refinancing a commercial property required the effort it does today. The underlying factor is the universal drop in commercial real estate values. What began as a downturn in residential real estate values spread to commercial real estate as the economy worsened, occupancy levels dropped and the collapse of the CMBS market in the third quarter of 2007 thereby eliminating one of the largest players in the debt markets.

The good news is that as of the third quarter of 2010 occupancies have pretty much stabilized across all sectors.  Many lenders are back in the practice of lending albeit at different and more stringent terms than just a few years ago and the CMBS market is beginning to shows signs of coming back. Unfortunately, this recent good news doesn't necessarily help existing owners with mortgages maturing in the next year or two. The two main reasons are; lower loan-to-values on mortgages written today vs. pre-2007 and the drop in real estate values. These two factors combined have stripped away much of the initial equity that was present at acquisition. With that said, there are options and there are lenders that understand the underlying value of commercial properties is still present regardless of current appraisals. We work with clients everyday navigating this "new normal" lending environment.

By Rob Schick

Appraisals - in todays market appraisers are more conservative than ever and are having difficult times finding comparables for projects. This has a huge effect on refinances, purchases and sales. As owner you or your representatives need to be proactive in this process. Lenders usually will provide you at least three choices of appraisers try to educate yourself to their track record or get references. Once an appraiser is selected try to provide them as much favorable information that not only helps your case but makes their job easier. To often owners just let the appraisers go with no input and once the appraisal is done their is no chance to state your case. We saw two appraisals on same residential development that were over $1m different!!