January 27, 2023

We see new headlines all the time… the US Healthcare system is consolidating into fewer, bigger players.

This is being driven largely by economics… as there’s greater incentives for providers to team up for scale benefits. Many community hospitals are being scooped up into regional hospital systems. And medical groups are getting larger… leaving fewer and fewer small independent medical practices.

There are also deep-pocketed outsiders who are trying to make a big healthcare play, like Amazon, CVS and Walgreens.

A question I hear often is: Is this good for MOBs?

On the whole, the answer is “yes”.

The key reason is because bigger healthcare organizations tend to have better credit… and better credit reduces tenant-related risks… and often increases the time commitment of leases… these factors lead to substantially higher property valuations.

We’ve had a number of recent contract renewals that played out just this way… where a tenant had joined a larger medical group… and as part of negotiations we’re able to get the larger medical group (with a name brand, and high credit) to put their name on the lease. This led to substantial value creation… even though the actual doctors in the office did not change at all.

And while larger medical groups do have deeper pockets… they tend not to want to be in the “real estate game”... so don’t want to own a huge real estate portfolio, even if they could.

This trend presents substantial value-creation opportunities for Alliance, as we invest in medical office buildings.

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