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December 5, 2011

Why Not Sell Those Medical Office Buildings?

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Back when the U.S. financial crisis was at its height, hospitals were searching desperately for assets which could keep them above water. And there was one type of asset which largely held its ground.  Though most other investments tanked, medical office buildings were a lone bright spot.

In 2008 and 2009, hospitals began unloading their MOBs, selling them to investors and leasing them back in an effort to keep the ground under their doctors’ feet. Commercial real estate players — notably real estate investment trusts — were only too happy to participate in these deals, as MOB properties had a rep for being nearly recession-proof.

By mid-2010 or so, MOB fever calmed down. But now, with the hospital industry’s health improving, it may be heating up again. If your hospital owns Class A medical office space occupied by affiliated doctors, you’re likely to get courted by real estate investors in the next few quarters.  (That’s my prediction, not some real estate exec’s, but the signs are there and MOB buyout momentum is growing again.

After all, consider the trends. Demand for medical office space is growing, boosted by rents hovering at about 5 percent below pre-recession levels, according to commercial real estate research firm CoStar Realty Information. Also, hospitals continue to need more space to house the practices they acquire, which will absorb any left-over vacancies and raise the value of the properties investors already own.

Not only that, there are long-term forces which are likely to keep demand high for MOBs. Commercial RE investors expect the coming growth in demand for outpatient services — which should hit 22 percent by 2019, according to McKinsey Global — to generate strong returns for medical property owners.

So, what does this mean for you?  Well, if you didn’t sell your MOBs a few years ago, you may have another chance. Bear in mind that investors are more interested in signing MOB deals with big chains like Tenet or HCA, as aggregating properties makes more sense than negotiating one deal at a time. But you’ve still got a special asset there.

Bottom line, if you have new (or newly-upgraded) medical office properties on your campus, consider whether they’d be more valuable as a lease-based tax deduction.  My guess is that you’ll be able to redeploy the cash more effectively in other areas of your operations — such as, say, building up your EMR.  And hey, you’re not really in the real estate business anyway, are you?

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