Hartford Business Journal

HARTFORDBUSINESS.COM | NOVEMBER 27, 2023 5 Deal Watch A partnership between real estate investment firms Sendero Capital and Angelo Gordon recently bought this 53,120-square-foot medical office building in Hamden, at 1952 Whitney Ave., for $8.9 million. PHOTO | COSTAR Healthy Market Despite office sector's woes, demand for medical space remains robust quarter of 2014 and first quarter of 2015, to no space added between the pandemic-impacted first quarters of 2020 and 2021, according to Revista. Few developers and lenders are interested in pursuing medical office construction on speculation, damp- ening inventory growth, Martin said. Current trends are leading to higher rents on existing facilities. Tradition- ally, 2% annual rent increases were the norm, Martin said, but now land- lords are pushing annual increases of 3% or more. Medical office vs. general office Philip Gagnon, principal at Colliers International in Hart- ford, represented the seller of the Torrington medical office property and touted the deal as a counter to the stream of negative news about office space. The niche medical office market has "soared" to new price levels as buyers are willing to accept lower returns in the first year of their investment, he said. Gagnon said rising borrowing costs have put pressure on some investors, likely making them more selective. Class B medical space offers more room for raising leasing rates than Class A, he said. Jay Morris, managing director of O,R&L Commercial Real Estate, said telehealth is a good tool, and was especially useful during the COVID-19 pandemic, but it has turned out to be no replacement for in-person physician visits. "We are still seeing positive absorp- tion of medical space and rents have been stable and growing, just like the occupancy," Morris said. "It's a totally different animal than general office space." Morris said some plans for new medical offices are moving forward out of necessity. For example, construction began earlier this month on a new 48,000-square-foot medical office complex in North Branford, to be anchored by community behavioral health clinic BHcare. Other discretionary projects are By Michael Puffer mpuffer@hartfordbusiness.com B oston-based Sendero Capital and alternative investment firm Angelo Gordon partnered earlier this year on a $300 million effort to acquire outpatient medical office buildings in a corridor stretching from just north of Washington, D.C., to New England. The partners' first acquisition in June brought them to Connecticut, where they paid $8.9 million for a 53,120-square-foot medical office building in Hamden. Anchored by Hartford HealthCare, the building was 88% occupied at the time of the sale, including by physicians in a range of specialties. The partners' fourth investment, in October, also took place in Connecticut — an $8.15 million purchase of a Torrington property hosting two fully leased medical office build- ings totaling 37,721 square feet. Sendero Capital Principal Ross Negele said his group is considering additional Connecticut acquisitions. "We look at outpatient medical and its shift to the suburban environ- ment as a positive for patients and providers and the future of care," Negele said. Experts agree demand for medical office space remains strong in Connecticut, although high interest rates coupled with other healthcare industry challenges are prompting some to hold back on new construction. Across real estate asset classes, builders are finding increasingly reluctant lenders and stubbornly high construction costs. Connecticut's demanding regulatory approval process is another roadblock to new construction, making existing healthcare facilities increasingly attractive to investors, experts say. Higher rents According to Maryland-based healthcare real estate data provider Revista, the amount of medical office space in Hartford, Tolland and Middlesex counties has increased by 20% over the past decade, to 6.8 million square feet as of the first quarter of this year. Occupancy has hovered around 94% for a decade. Revista Principal Hilda Martin said construction of medical office space has slowed nationally, even as demand remains strong. The amount of new U.S. medical office space being added is hovering around 1% annually, but space is being occupied at a faster rate, Martin said. "I think it's very similar to other sectors; you have players sitting on the sidelines waiting for other things to shake out," Martin said. "There is a disconnect between lender interest and investor interest." The amount of medical office space added annually in Connecticut has varied widely, from a high of 606,528 square feet built between the first Philip Gagnon Jay Morris Ross Negele 7M 6.5M 6M 5.5M 5M 1Q13 INCREASE IN SQ. FT. 1Q13 1Q14 + 91.3K 1Q15 + 606.5K 1Q16 + 51K 1Q17 + 35K 1Q18 + 57.3K 1Q19 + 168K 1Q20 + 33K 1Q21 + 0 1Q22 + 66.2K 1Q23 + 57K MEDICAL OFFICE SPACE (sq. ft.) Medical office square footage for Hartford, Middlesex and Tolland counties Source: Revista

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