The market is shifting – what now? Despite the continuing rise in interest rates and the uncertain effects it will have on the economy, we believe certain sectors and markets are uniquely suited to thrive. You just need to know where to look.
Who Has An Advantage?
Investors with cash-on-hand will have a distinct advantage over competition that needs to take on debt as the cost-to-capital continues to rise. As a result, there will be opportunities to acquire quality assets at what some would perceive as a discount from the previous few years. There are institutional players and other investors in the market that are seeing this as an opportunity since they have a lot of capital in hand that needs to be deployed. They can buy deals with cash, get higher yields than what they have become accustomed to in the past 4 years, and then refinance when rates go back down in the future. A lot of long-term holding investors will still be very active. Investors who have loans coming due will need to seriously evaluate their portfolios and potentially look to dispose of some assets instead of refinancing.
Sands Investment Group Advisor, Gary Heeseman, on the impact of interest rates: “Since the beginning of 2022, the Federal Funds Rate has increased 375 basis points with further hikes expected before year end. Higher interest rates and less liquidity in the marketplace will lead to a decrease in overall transaction volume and shrink the buyer pool. That compression will cause cap rates to increase creating an opportunity for those investors that have been waiting to deploy capital. This is the moment some investors have been waiting for.”
Where Is The Opportunity?
If you take a look at top 100 Medical Office Building (MOB) markets in the US, transaction volume has grown from $18.2B to $24.5B in the last quarter alone, vacancy rates have fallen 40 basis points in the first half of 2022 to 8% and transaction volume has also increased by 79.2% from 2021, setting yet another record for the sector.
Higher prices don’t always mean higher rents and having a trusted investment advisor who is familiar with these markets is important in order to avoid invest
ment deals with weaker cash flows. If you know where to look, medical office properties in specific markets provide a solid tenant mix that will yield long-term value for investors. What drives the growth and success of these top 100 MOB markets? The location.
Markets with an increase in population, economic, and job growth will provide great investment opportunities. Heeseman says, “More than ever, Americans are considering cost-of-living and quality-of-life when deciding where to live. Remote workers and retirees flock to warmer weather with lower taxes strengthening migration markets. The movement of those people creates the need to provide infrastructure to support them. We have a lot of baby boomers and they have medical needs. Sunbelt states, such as Florida, Texas, and California have seen favorable migration trends and job creation that will minimize risk.” L.A, DFW & Houston alone account for nearly one-quarter of added MOB space within the last decade.
While the world continues to evolve, Sands Investment Group will continue to flesh out opportunities that exist and bring them to our clients and potential investors.
Check out our Newest Medical Office Building Opportunities.
This article was originally featured in WMRE 2023 Market Outlook.