CoStar Insight: One Medical Office REIT Makes Up Significant Chunk of Total Investment Volume

Office investment has reached new heights in Seattle this year, and while most of the sales involved large office towers or suburban complexes, other deals have helped push the envelope in the Puget Sound region.

Total medical office sales volume sits around $344 million as of early December, already nearly 45% higher than last year’s total.

Medical office space has been popular with investors due to its tight vacancies. The vacancy rate for medical office space in Seattle is around 3.5%, compared with 5.9% for office as a whole. Growth prospects for the property type are positive too, especially with an aging baby boomer population and a dynamically growing healthcare sector.

In Seattle, Medical office buildings account for roughly 7% of total office volume thus far in 2019, with one deal in particular having an outsized impact on volume.

Portland, Oregon-based Menashe Properties acquired the Medical Dental Building in downtown Seattle for $113 million, or $384 per square-foot at a 5.8% capitalization rate in September. The property was purchased from Goodman Real Estate, which renovated the property in 2008 and invested more than $25 million in building upgrades shortly before the property sold.

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Nearly one-third of this year’s total medical office investment can be attributed to one buyer: Healthcare Realty Trust.

The Nashville, Tennessee-based company is no stranger to the Seattle market, with 32 properties in its Seattle-area portfolio. This year has been particularly active for the REIT, though, with more than $70 million invested in the metropolitan area, not including a large construction project in Renton. All told, the company has more than 1.2 million square feet in its Seattle portfolio, the second largest of its holdings next to Dallas.

Healthcare Realty Trust’s most recent purchase is Totem Lake Medical Plaza. In November, the REIT paid the property’s developer, Radovich Development, $22.8 million, or about $627 per square foot, for the outpatient facility in Kirkland. That works out to a 5.5% cap rate, which is roughly 50 basis points higher than the 12-month average for medical office properties on the Eastside.

Other Healthcare Realty Trust transactions include the purchase of two outpatient facilities in the Northgate area of Seattle. It bought Northway Square East for $30.5 million, or approximately $390 per square foot, at a 5.7% cap rate in June. The facility was previously bought by the seller, Pac Pacific Properties, for $19.6 million in 2008. In the same area, Healthcare Realty Trust paid $19 million, or around $413 per square foot, for Northgate Meridian in June. The property traded at a 5.4% cap rate.