Published on Wednesday, September 20, 2023

Some real estate groups are turning to more niche subsectors, such as MOB.


The combination of long-term, net leases to tenants with low default rates, the stabilized cash flow to owners, and the adaptability of space make medical office buildings attractive to lenders.

These factors significantly reduce the likelihood of a borrower default under any loan secured against the property on which an MOB is located, according to Attorney Liam T. Krahe, managing attorney of Cohen Property Law Group, PLLC.

The stability is driving deals in the space even as transactions across CRE decline. The most recent example comes from Kayne Anderson Real Estate's $1.3 billion purchase of Synovus’s medical office loan portfolio.

The portfolio consists of 106 floating-rate mortgages secured by 308 medical office building properties, spanning 33 states.

The deal is sponsored by several blue-chip institutional MOB investors. With approximately 35% of the properties anchored by hospital systems, the portfolio – which totals just under 13 million net rentable square feet – is 92.3% leased on a long-term basis with a weighted average remaining lease term of nine years.

JLL Capital Markets served as the exclusive financial advisor to Synovus.

The sector can expect more interest, according to other analysts.

Krahe tells that he is not surprised Kayne Anderson is acquiring Synovus’ loan portfolio.

“From an underwriting standpoint, medical office buildings are attractive because they are typically occupied by high-income producing and strong creditworthy tenants such as physicians, dentists, and other health care professionals.

“Leases for medical and dental offices are typically between five to 10 years and include at least one or more extension options of three to five years for each extension period. Additionally, MOB tenants are less likely to relocate to another building because they usually make significant capital investments in their respective office space.”

Lastly, converting a traditional office space into a medical office is difficult and expensive, he said.

“MOBs are generally more adaptable and may be repurposed for various healthcare uses or specialties,” Krahe said.

Finding Fundamentals ‘Attractive’

John Wilson, president of HSA PrimeCare, tells that this large portfolio transaction is a testament to the underlying fundamentals of the medical office market.

“To execute a transaction of this magnitude, investors need to believe in the performance of the underlying asset,” Wilson said. “High occupancy rates and long-term lease terms to hospitals and creditworthy healthcare providers are the typical fundamentals of the healthcare sector.”

Wilson said medical office continues to draw investment dollars whereas some of the traditional real estate sectors such as office and retail may be waning in interest.

“As a result, we’re seeing more investors transition into healthcare from these other asset classes,” he said.

Michael J. Romer, Esq., Co-Managing Partner, Romer Debbas, tells that because of the limits of telehealth and the ever-growing need for medical and health-related services, the medical office asset class (which includes debt) “remains quite attractive.”

As the population continues to grow so does the nation’s need for more doctors, nurses, and yes, more medical buildings, Romer said.

“Given the need and the profitable medical industry, debt on medical buildings remains a solid investment,” he said.

Doug Ressler, Yardi's CommercialEdge, tells that because the traditional office sector is in a holding pattern and in distress, some real estate groups are turning to more niche subsectors of the market, including medical office.

“The medical office remains a niche part of most real estate markets but being in growth mode it presents a stable alternate investment,” Ressler said.

He said the Southeast and Sunbelt markets are seeing greater activity and are experiencing atypical population growth of a wide variety of demographic groups.

“Healthcare and especially hospitals are spreading out across metropolitan regions and increasing their geographic footprints to reach a larger population to provide care for patients close to where they live,” Ressler said.

“The care environment has become more complex over the years. The larger systems bring a lot more resources to bear on many factors. Smaller stand-alone hospitals, urgent care, and repurposed retail assets need the backing of a larger system or infusions of capital.”