Baby Boomers are the second largest demographic in the U.S., and with 76 million members – 10,000 of whom will turn 65 every day for the next 11 years – it’s no surprise that medical buildings have become the most popular investment.
The Affordable Care Act has also increased the demand for medical buildings. Hospital administrators, for fear of being penalized for high remission rates, have begun acquiring medical buildings in an effort to provide patient care that helps reduce readmission rates while delivering low cost, efficient care.
And while these regulations are certainly trying for hospitals, this is actually good news for investors, as hospitals are more creditworthy than individual physicians and tend to lease spaces for as long as 20 years.
Capitalization rates for this asset type are low and are expected to keep falling, while vacancy rates are at the lowest point since the recession. Plus, because the demand for medical buildings is expected to keep rising, demand is likely to remain high.
Why Investors Like Medical Buildings
Medical buildings with state of the art equipment offering comprehensive care and a variety of medical services have proved to be a lucrative investment among both investors and developers.
Medical offices seem to do well regardless of the economy.
They are fairly recession-proof since everyone needs to see a doctor sooner or later. They do require a significant amount of management and need to be retrofitted according to very particular specifications, however, there are several types of tenants investors can choose from, depending on your level of experience and investment goals.
Another important factor why medical buildings are excellent investments is due to strong retention. Although net lease properties may vary from single tenant to a mix of diverse tenants, once the right tenants are found, they are unlikely to leave.
There are several reasons why this is so.
First of all, many buildings were commissioned with requirements specific to each practice, and relocating to another net lease property would involve considerable expense.
Second, many practices tend to work with or close to other physicians, and rely on one another to provide services for their patients. And third, most medical buildings are conveniently located in high-traffic areas, either near shopping centers, or other medical establishments.
Doctors – like most tenants – are unwilling to leave a premium location.
Another reason investors are flocking to medical buildings is that of the stable cash flow they provide. In addition to long leases and strong demand, more and more physician groups and hospitals have been utilizing sale-leasebacks.
In a sale-leaseback, a physician or hospital sells their net lease property to an investor, who in turn leases it back long-term to the previous owner. This allows the physician-owner to utilize the resulting capital to pay back debts or expand their present business, while the investor gains a net lease property with a guaranteed cash flow.
2. Industrial Net Lease Properties
Industrial real estate properties are the second most popular type of asset right now. Both single tenant and multi-tenant properties are in high demand, with 40% of all industrial space and 60% of all new leases made up of multi-tenant properties.
Industrial real estate’s popularity is largely due to the effect of e-commerce on both the retail and industrial sectors. The demand for instant gratification has pushed large retailers like Amazon to open up smaller warehouses near cities in order to easily fulfill next day and same day orders.
However, e-commerce isn’t the only niche that is changing industrial real estate.
IoT, the Internet of Things, has also spurred a demand for numerous smaller data centers located next to population centers. With everything from smart appliances to smart toys, to self-driving cars connected to the internet, manufacturers need data centers in order to process the large amounts of data required to run them.
Other tech companies, such as cloud server farms, are also hopping on the bandwagon.
However, because of the space required to house the massive servers and other tech equipment, companies like Facebook and Microsoft are heading towards rural areas where land is cheaper. This makes it easier for them to get inexpensive access to large tracts of land, cheap power, and water for cooling systems.
As a bonus, farm states like these also give huge tax and business incentives for companies to move there, in addition to being willing to build the necessary infrastructure.
3. Restaurants/Fast Food
The retail market is still full of ups and downs, but there is one niche that is doing well despite the turbulence: quick service restaurants, also known as QSR’s.
Unlike other types of retail stores that must compete with online companies, QSR’s are service-based businesses that offer an experience that can’t be duplicated online. As a result, these types of businesses are actually experiencing an upswing, and in some places, there is actually more demand than supply.
There are a wide variety of restaurants to choose from, including investment grade tenants such as McDonald’s and Burger King. And although these premium investments command top dollar, the NOI they offer makes them excellent long-term investments.
Of course, you’ll still want to do your due diligence; QSR’s have very specific location requirements, taking into account vehicular traffic, the commercial mix, consumer demographics, and other factors.
In short, there are plenty of options for net lease investment for investors interested in diversifying their portfolio. With the right investment, ensuring you have a steady flow of cash and guaranteed income are just a step away.