Strong medical office market bucks trend

It isn't often these days that a building sells for 63 percent more than it did four years ago, a period during which nearly all real estate lost value.

But that was the case this week after Healthcare Trust of America, an Arizona real estate investment trust, paid $16.65 million for the 89,000-square-foot Raleigh Medical Center off Duraleigh Road.

The seller was Craig Davis Properties of Cary.

The price, about $187 per square foot, was further proof that the Triangle medical office market continues to perform well.

The resiliency can be attributed to a couple of factors.

Although health care has become politically divisive, from a real-estate standpoint, it continues to be one of the few growth markets.

As baby boomers age, demand for health-care services is expected to increase no matter what reforms are made to the country's health-care system.

All the major hospital systems in the Triangle have announced ambitious expansion plans at a time when new construction of traditional office properties has come to a near standstill.

Medical buildings also tend to experience less turnover among tenants.

Much of the value of a medical building is derived from its close proximity to, and relationship with, a hospital or larger medical center. The Raleigh Medical Center, for example, is adjacent to Rex Healthcare's main campus.

Unlike, say, a high-tech firm, a doctor's office is less likely to relocate to nicer space during a dip in the market because doing so would be a huge inconvenience for their patients.

"This is where my patients have been coming for the last 20 years. Why would I want to confuse my patients by moving?" notes Andrew Kelton, head of CB Richard Ellis' asset services group in Raleigh. "Especially if you're next to the hospital."

The Raleigh Medical Center is 91 percent leased, and its tenants have, on average, seven years remaining on their leases. About 65 percent of the building is occupied by three tenants: Wake Research Associates, Triangle Orthopedic Associates and Carolina Ear and Hearing Clinic.

Kelton said medical office buildings, along with multifamily apartments, have become the most sought-after properties by investors because they are reliable income-generating assets.

They are also garnering some of the lowest cap rates, which refers to the ratio of a building's annual net income to its purchase price. Whereas a traditional office building might fetch a cap rate of 8.5 percent in today's market, a medical building might trade at closer to 7 percent, Kelton said.

Hock Plaza I, a 327,000-square-foot medical building in Durham, traded at a 7.25 percent cap rate this year.

Many of the recent buyers of medical buildings in the Triangle have been institutional investors that had little or no prior presence here. The Raleigh Medical Center is the first North Carolina acquisition for Healthcare Trust of America, which owns 9.3 million square feet in 24 states.

Given the Triangle's diverse economy and the region's popularity with retirees, other investors are likely to follow.