Medical Office Rents Weather the StormPosted by: jhon | Posted on: June 11, 2020
The medical office sector hasn’t been immune from issues caused by COVID-19. But Kyle O’Connor, president and founder of MLL Capital, would still rather be in that commercial real estate asset class than any other part right now.
“The medical health care sector and the science sector seems to be holding up a bit better than some other property types,” O’Connor says. “Certainly, hotels or retail are having a different experience. For us, it’s one of the reasons why we liked the sector and continue to like it a lot. We viewed the asset class as having a number of supportive features associated with it.”
Still, there are issues in the medical sector. “A lot of people are very concerned that the risk of catching something in the doctor’s office might be greater than whatever the issue in the house,” O’Connor says. “Over time, I think the expectation is that it will dissipate, and the need for those basic health care services will resume.
In April, MLL, which has 15 buildings in the medical and life sciences sector, collected 97% of rents. In May, the company collected more than 97%. And, as things open up in June, O’Connor sees things improving further.
America’s vast, aging baby boomer demographic is one reason that O’Connor likes the medical segment, but it’s not the only reason.
“We find that a lot of the practices are in relatively healthy condition,” O’Connor says. “Their leverage levels tend to be lower in many cases. It is a business that does not have a lot of high highs or low lows.”
In a market where there’s still a lot of capital, and other sectors of CRE are floundering, O’Connor expects more interest in medical office properties. But interested buyers will run into roadblocks.
“Because of the specialty nature of the property types and the things that you learn by being in the space for a bit, I’m not concerned,” he says. “It is a type of property where it’s very beneficial to have experience and knowledge. We don’t think it’s one that, you know, capital readily flows into.”
But investors are still taking a wait-and-see approach for the time being, according to O’Connor. “For a small asset class like medical is, it’s too early to make any real prognostications,” he says. “We do think that it is the right time to be in the market and looking for investment opportunities, which we’re trying to put a lot of energy into doing right now.”
Right now, O’Connor doesn’t see large loads of capital focused on the space. “They may have some other opportunities that are distracting them or maybe presenting themselves,” he says.
Right now, O’Connor sees that capital focused on other targets. “I think if you’re an opportunistic fund, you’re probably spending a lot more time looking at the hotel sector, than you would be the medical sector. There’s probably distress pricing happening there. I’m sure some hotels are in default. Whereas, most medical office buildings have had a performing loan in March or probably still going to have a performing loan [in the future].”