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Net Lease Medical Sector Cap Rates Compress

By Guest Author | December 2, 2015

Cap rates in the single tenant net lease medical sector compressed in the third quarter of 2015 with the median asking cap rate declining by 22 basis points from a year ago.


This can be primarily attributed to the growing investor interest and demand as a result of the increasing aging population of the county. In addition to the positive outlook of the healthcare sector, most medical related leases feature rental escalations and credit tenant lease guarantees. These attributes are highly sought after characteristics amongst net lease investors.

The median cap rate for the net lease medical sector was 15 basis points below the overall net lease market as of the third quarter of 2015. Investors are drawn to this sector as 40% of the properties are tenanted by investment grade rated companies. Additionally, the lower price points associated with this sector have garnered interest from 1031 buyers who traditionally purchase net lease retail assets. The median price for net lease medical properties in the third quarter of 2015 was approximately $2.5 million.

An increase of new tenants to the net lease medical sector continues as the shift from traditional hospital and on-campus office locations moves toward convenient and easily-accessible free-standing locations. These new locations are largely in areas traditionally frequented by retail tenants including shopping centers and areas along primary thoroughfares.

The growth of the sector should continue to expand as the demographic makeup of the population continues to shift. According to the US Census Bureau, seniors over the age of 65 made up 13.4% of the population in 2012, however this same age group will increase to 22.1% by 2050. The aging demographic creates a strong outlook for this sector as seniors aged 65 to 74 and 75+ average 6.2 and 7.2 doctor visits per year respectively according to the US Center for Disease Control. The overall average across all age spectrums is 3.3 visits annually.

The single tenant net lease medical sector will remain active as investors remain attracted to the long term outlook for healthcare as the aging demographic grows. As the trend continues for new locations in easy-access and traditional retail areas, look for more 1031 investors and historically private retail buyers to evaluate this asset class.


About the author: Randy Blankstein is President of net lease advisory firm The Boulder Group.

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