Net Lease Medical Properties with Investment Grade Tenants in Short Supply

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The Boulder Group cites 89% of medical properties lack an investment grade guarantee

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The net lease medical sector is priced at a significant discount to the overall net lease sector

The Boulder Group announced the release of its Net Lease Medical Report today. In the third quarter national asking cap rates in the single tenant medical sector increased to 6.50%, according to the 2020 Net Lease Medical Report. This represented a 5 basis point increase when compared to the prior year.

“The primary reason for the slight increase in cap rates for the net lease medical sector is to attributed the higher concentration of non-investment grade tenants in the sector,” says Randy Blankstein, President, The Boulder Group.

According to the report, non-investment grade tenanted properties made up 89% of the supply in the third quarter. Despite investor concerns surrounding the Covid-19 pandemic for the overall net lease sector, the net lease medical sector saw an uptick in transaction volume through the third quarter of 2020.

“When compared to 2019, transaction volume in the third quarter for the net lease medical sector increased by approximately 6%,” adds Jimmy Goodman, Partner, The Boulder Group. “Investor demand increased as medical related assets are considered essential operators.”

The net lease medical sector is priced at a significant discount to the overall net lease sector. In the third quarter, net lease medical properties were priced at a 28 basis point discount to the overall net lease sector. However, cap rates for properties with investment grade rated medical tenants commanded a significant premium.

“In the third quarter of 2020, investment grade back tenants were priced at a 57 basis point premium over the overall medical sector,” John Feeney, Senior Vice President, The Boulder Group adds.

Both private and institutional investors continue to seek investment opportunities within the single tenant medical sector. Investment grade medical tenants such as hospital backed systems and Fresenius typically generate lower cap rates due to the increased demand from private and 1031 investors. However, as new brands emerge from the “medtail” sector, private investors have widened their acquisition criteria to include urgent care groups as higher yields can be achieved.

The single tenant net lease medical sector will remain active as investors are attracted to the long term outlook of the healthcare sector and the increased need for conveniently located healthcare. “As the impact of Covid-19 continues to evolve in the overall net lease sector, e-commerce resistant and essential based businesses including the medical sector will be the biggest beneficiaries,” according to Blankstein. “Demand from both private/1031 exchange buyers as well as institutional investors will continue to target this asset class.”

To view the full report:

About The Boulder Group

The Boulder Group is a boutique, Chicago-based investment real estate services firm specializing in transaction and advisory services for single tenant net lease properties. Founded in 1997, the firm has closed over $6 billion of net lease property transactions. The firm provides a full range of brokerage, research, advisory, and financing services nationwide. The level of annual, single-tenant transaction volume consistently ranks the firm in the top 10 companies nationally, according to industry benchmarks determined by CoStar and Real Capital Analytics.

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