The medical sector has been a thriving sector for net lease investors.
The trifecta of growing demand, difficulty relocating clinics and offices, and the necessity of face-to-face interaction are driving factors for net-leased medical properties.
Advances in medicine have led to people living longer and requiring more medical care. This increased need will likely push facilities to their full capacity. As this need grows, so will the number of medical offices, dialysis clinics, and urgent care locations.
Medical offices face large upfront costs due to the extensive build-outs, and the highly specialized equipment needed. Urgent cares typically have large amounts of specialized medical equipment, such as X-rays machines, that can be difficult to move, while dental offices will typically have water and drain lines to and from most rooms, a unique feature not needed by most tenants. These factors contribute to tenants’ tendency to stay for the long term.
Medical care generally requires a face-to-face interaction between patient and physician. This physical interaction is not able to be replicated by any web-based vendors so the properties occupied by physicians are regarded as safer investments.
The medical sector has a wide variety of tenants with their own unique qualities. DaVita Dialysis and Fresenius Medical Care make up the majority of the dialysis clinics market while urgent cares and dental offices are made up of a wide variety of tenants with small market shares.
DaVita and Fresenius have similar credit ratings but an important dividing line lies between them. Fresenius, rated at BBB-, is considered “investment grade” while DaVita is not. The difference in cap rates is driven less by credit rating and more by average lease term remaining. DaVita, on average, has slightly more lease years remaining than Fresenius.
DaVita and Fresenius are highly desirable net lease tenants. They offer minimal landlord responsibilities with rental increases during the primary term. Most importantly, their locations are well located for their business. Operating near doctors’ offices and hospitals provide a synergy that is beneficial to both patients and clinics. These tenants may also require a permit of use, meaning they can only operate in locations approved by the local or state government. This can add to the costs and difficulty of relocating the clinic, however, this benefits the landlord.
The medical sector has typically traded at slightly higher cap rates than the Single Tenant Net Lease (STNL) average.