Posted June 05, 2013
On May 15-17, Urban Land Institute (ULI) held its annual Spring Meeting in San Diego, which attracted a record-breaking 3,500 participants. On behalf of NexCore Group, I participated in a panel discussion entitled Outside the Box: Investing in Emerging Niche Strategies. The focus of our discussion was on the keys to successfully implementing the strategy in three niche markets: workforce housing, student housing, and medical office. The panel participants were:
Moderator: Bob O’Brien, Partner and Vice Chairman of Deloitte & Touche.
Workforce Housing Panelist: Mike Schwaab, Director of Property Investments and Capital Markets at Henderson Global Investors.
Student Housing Panelist: David Selznick, Managing Director of Kayne Anderson Real Estate Advisors.
For many people, ULI does not automatically come to mind as a forum for those involved in the medical office building (MOB) sector. However, over the past few years, ULI has begun playing a more prominent role in the sector both in print and on the conference circuit. ULI’s more prominent role began with the formation of its Healthcare & Lifesciences Council in 2010. The Council was created to bring private sector developers and investors together with institutional representatives, as well as architects and other consultants, to share knowledge and ideas unique to these asset classes.
Thanks to ULI’s reputation and the growing prominence of the MOB sector itself, we had an unusually energetic and engaged audience. In fact, Jed Gates, the panel organizer and a Market Principal with Greystar, told me that he had never seen an audience at a ULI panel session ask so many quality questions.
When it came time to discuss the medical office market, the audience laughed when I said that the term “niche” was an upgrade from the adjectives and epithets that were thrown my way in connection with MOBs nearly 20 years ago when I first suggested that MOBs were a good place to invest funds. In those days, a favorable opinion of the reliability and consistency of the MOB income stream was often overwhelmed by negative perceptions of buildings filled with sick people and small, demanding tenants.
The tide of popular opinion has changed, however, especially as everyone has witnessed how well MOB asset values weathered the Great Recession. In today’s market, the demand for MOB investments actually outnumbers the supply of attractive investment opportunities. While the MOB sector is still considered by many to be a “niche” relative to the broader array of institutional real estate investment groups, some would argue that outpatient facilities are quickly evolving from a “niche” to a “core” asset class.
It, therefore, was not surprising that an informal show of hands in the audience indicated that roughly one-third of those present had invested in MOBs in the last year or were planning to do so. With relatively limited opportunities to put dollars to work in the MOB sector, almost all the questions involved financial performance metrics and investment risk mitigation.
Our strategy is essential to achieving financial results for all stakeholders and mitigating their risks, but the implementation of the strategy is where the real challenges ensue. Wisely the audience asked lots of questions concerning strategy implementation and how to avoid the pitfalls that can ensnare inexperienced MOB investors.
From NexCore’s perspective, a cogent MOB investment strategy that mitigates risk and supports the financial objectives of investors consists of three main elements:
Implementing this strategy requires an experienced team of professionals willing to operate as an extension of the hospital team and willing to create solutions collaboratively through the entire delivery process from planning to property management.