Sovereign Wealth Funds, Private Equity Step Up MOB Acquisitions

For the unfamiliar, MOB stands for Medical Office Building.

Obviously, MOB is a niche, and sovereign funds and private equity are BIG players … with big research budgets and smart analysts.

So watching what big players are doing is one way to identify a hot niche.  Then you look for a niche within a niche where Main Street investors can play.

But first, let’s look at why the big boys like MOB …

“ … increasingly view medical office space as a core property type with strong fundamentals.”

“ … demand for space continues to grow amid an aging population in need of more medical services …”

 “This particular sector of commercial real estate benefits from one of the largest and fastest-growing components of the U.S. economy: healthcare … ”

That “aging population” they’re referring to are the baby-boomers.  This huge demographic wave is sometimes called “the silver tsunami” because of its economic size and impact.

It’s something we’ve been following closely … including which industries and geographies stand to benefit.

But if the big boys are already in the space, is it too late?  Or is there still opportunity for Main Street investors?

We think there is.  And clues in the article support the thesis …

“ … risks facing medical office investors …  tenants are increasingly facing reimbursement pressures from insurers and government payors such as Medicare and Medicaid … ” 

“…  medical office facilities do not offer tenant diversification … tenants are exposed to the healthcare sector, unlike conventional office buildings …”

 “ … a shift of providing high-quality care … [in] alternative settings …” 

So let’s consider how these clues might fit together to spell opportunity …

First, it’s not MOBs that big money is excited about.  It’s the demographic and industry that the properties support.  It’s about elderly people and healthcare.

The properties are actually a problem because they’re specialty use.  A medical building is typically only suited to medical uses.  That can be risky.

So, even though medical buildings appear strong for the long haul, it’s still a one-trick pony.  If the sector cools, you’re trapped in a property that’s not of much use for anything else.  Yikes.

Next, the tenants of MOBs are healthcare providers whose income is largely derived from insurance and government reimbursements, which are facing downward pricing pressure.

Savvy landlords always look past the tenant to the tenant’s ultimate source of income.

In this case, “commodity” healthcare providers are getting squeezed by stingy insurance companies and social services.  Not good.

Lastly, the article reports a “shifting preference” by tenants (healthcare providers) towards “providing high quality care [in] alternative settings …”

Now THIS is interesting!

It seems those providers being squeezed are moving towards sub-niches where there’s more profit.

In fact, people we know in healthcare say a popular strategy for combating the declining margins of “commodity” healthcare …

(commodity healthcare are the kinds of services major insurers and government programs aim their cost-cutting strategies on)

… is to focus on boutique services for affluent clients who pay by cash or through private insurance.

That’s a clue.

How can Main Street real estate investors play?

Since we’ve already identified the demographic (boomers) and economic sector (healthcare), let’s focus on the property.  After all, we’re real estate guys.

We’re looking for a property well-suited to a boutique healthcare for an affluent, self-paying, or privately insured sub-demographic.

Of course, Main Street real estate investors aren’t healthcare professionals.

So we either need to find tenants who are, or find a simple healthcare service we can deliver through readily out-sourced operators.

And we’ll need to pick a property type that works well for the healthcare service … but also other things, so we don’t get trapped in a single-purpose property.

Sounds like a tall order …

Or maybe the answer is right in front of you … or next door … or down the street.

Single-family homes!

But not just ANY single-family homes … residential assisted living homes.

This is an exciting sub-niche of the healthcare real estate niche that checks a lot of boxes …

First, your tenants are the parents of boomers (today) … and will soon be the boomers themselves.  That’s a substantial long-term pipeline of tenants.

Plus, boomers are the most affluent demographic right now … and paying for Mom or Dad’s care is a TOP budgetary priority.

It’s always good to be at the front of the line for getting paid.

Also, care fees (rent) are often paid out of a combination of the parents’ estate, private long-term care insurance policies, or incomes and assets of the adult children.

So when you’re in what our residential assisted living guru Gene Guarino calls “the sweet spot” … you’re not dependent on government reimbursements.

Residential assisted living homes are boutique, high-quality, “alternative setting” healthcare … which, as the article points out, is the trend.

Another investing adage is, “The trend is your friend“.

Check.

Next, residential assisted living homes are NOT big, single-purpose commercial buildings well-suited only for use as a medical facility.

Residential assisted living homes are operated in single-family houses located in regular residential neighborhoods.

No special zoning.  No commercial location.

So if for some reason the bottom falls out of the sector … the home can be rented to a residential occupant (albeit at a much lesser rent), or simply sold on the open market to an owner-occupant.

In other words, you’ve got multiple exit strategies.  You aren’t trapped by your niche.  This mitigates one of the major risks the big boys fear.

Check.

But perhaps one of the greatest advantages in the sub-niche of residential assisted living homes is the ability to QUICKLY right-size to changing market conditions.

Big-box commercial properties are all-or-nothing propositions.  That’s another worry for the big guys.

When you have a 120-bed medical facility and profits get squeezed or things slow down, you still have 120-bed facility … and all the fixed costs which come along with it.

There’s no throttling capacity up or down based on demand.

But when you own ten 12-bed homes and things pick up a little … you simply add one more home to your collection and increase capacity to 132 beds.

Compared to a big-box, the properties are easy to find, set up, and get optimized.  You can catch an “up” wave sooner and ride longer.

Even better, if things slow down, you simply consolidate your residents into fewer homes … and sell or rent out the excess properties individually.

Again, there a multiple exit-strategies, and when it comes to real estate, single-family homes are arguably the most liquid.  A big-box?  Not so much.

This is HUGE in terms of maintaining profit margins … even in a declining market.

Think about it …

A big-box can’t cut facility overhead.  They either own the whole property or they don’t.  It’s all or nothing.

So the only way preserve margins when occupancy is down is to cut back on staffing, care, and amenities.  Not good for the resident under care, nor the staff or brand.

Meanwhile, the residential assisted living home operator has an advantage …

While the big-box cuts services, the more nimble RAL operator can right-size and maintain or even improve services … and attract an unfair share of residents in a competitive market.

Big check.  And who doesn’t like big checks?

But whether or not residential assisted living is for you … (though it probably will be some day … we all get old) …

… there are still great lessons to glean about strategic sub-niche investing to find profits under the radar (at least temporarily) of the big players.

Until next time … good investing!

This press release just hit the wires …

Uber Real Estate is Now Disrupting Real Estate with Their Uber Model

Okay.  That’s interesting.  Uber certainly disrupted the taxi business, so anyone interested in real estate should probably pay attention.

What’s the angle?

Well, according to their press release they’ve come up with the innovative value proposition of cutting commissions …

“Uber Real Estate is disrupting the traditional real estate brokerage brick and mortar business model by reducing the transaction cost by up to 50 percent using their unique on-demand model.” 

Of course, no one in the history of real estate has ever thought of that before … besides Help-U-Sell, Purple Bricks, Assist2Sell, Redfin, and probably many more.

BUT … we should be open minded.  After all, we were snarky about Bitcoin and missed out on a big pile of free money for adding no value.

Oops.  Sorry, more snarkiness.

Back to Uber’s press release …

“You will never again pay a full commission using Uber Real Estate.”

“Consumers receive Uber – Like Execution with only experienced professionals, no more drama and only substantive yes or no, answers.”

“Uber Real Estate provides Broker and Broker Attorneys with ten to thirty years of experience to the company’s clients.”

“They actually do provide agency and work for the clients of the company as it should be …”

“Consumers just want to go online and get it done with Uber – Like Execution.”

“ …we are completely website driven. An Uber, mobile application, for Real Estate, is under development.”

So let’s consider what all this really means …

From a practical standpoint, for real estate investors, we’re not sure there’s much direct impact.

Maybe if you’re flipping homes on thin margin, shaving a few bucks off the listing commission means more beer money … and extra profit is always nice.

Of course, we think if you need the agent’s commission to make your deal pencil … you don’t really have a deal.

But that’s not the point.  There’s a MUCH bigger picture here, which is why this blip of news caught our attention.

Uber’s a big brand with a powerful reputation for disruption.  They claim they can disrupt real estate.

But they are NOT real estate guys.  They’re tech guys.  Just ask us to fix a website, and you’ll realize there’s a HUGE difference between the two.

And THAT’s the point …

We often say that what you think and believe will affect your actions … and your actions produce your results.  So beliefs are at the root of strategy.

In this case, we see the solution being presented as the fruit of a core belief held by tech people … and many in the paper asset investing world as well …

… that real estate is a commodity, and brokerage is about facilitating transactions.

They think that’s a given.  We’re not so sure.

But because SO many people outside real estate believe this also, from time to time they attempt to enter the real estate arena with solutions which don’t really fit the actual problem.

In fact, the problem they’re trying to solve is actually what gives Main Street real estate investors opportunity.

Further, we’d argue that if they actually could solve the “problem”, it would dramatically change the opportunity that so many Main Street investors THRIVE on …

Real estate brokerage is inherently inefficient.  And the reason is because real estate is NOT a commodity.

EVERY property, ownership, and location is UNIQUE.

Even two houses on the same street, built by the same builder, are different …

… based on their condition, modifications, seller motivations, financing, and many other factors unique to the property and people involved.

In this case, Uber is focusing on properties marketed to and by owner-occupants, which means the idiosyncratic preferences and financial capacity of the buyers come into play.

Last time we looked, no two buyers are the same either.

Even if you’re talking income properties (which Uber isn’t, so to Uber “real estate” is just houses for homeowners) … there’s the tenant mix, payment history, property management skill, expenses, etc.

On other words, real estate is a diverse, complex, messy hot-bed of drama, inefficiency, and opportunity.

It’s why the paper guys can’t figure it out on an individual property basis.

Paper guys have to pool everything together into a REIT or mortgage-backed security, so they can blend it all into a single commodity they can focus on.

But you can’t do that with individual properties owned by individual sellers being marketed to individual buyers.

So Uber’s going to cut commissions “by up to 50 percent” so sellers will “never again pay a full commission”.

Yet somehow with 50 percent less, Uber will attract “only experienced professionals” who will deal with real estate transactions in a drama-free, binary, “yes, no answers” way?

Yes/no binarism is the epitome of tech think … but not real estate.

Real estate at the homeowner level is about feelings … yes, “drama” … and it’s quite the opposite of binary.  It’s more complexity theory.

Real estate agents are negotiators, not transaction facilitators.  It’s all very squishy.

Maybe Uber’s next project will be to automate hostage negotiations, corporate mergers, or international diplomacy.  Good luck with that.

Tech is GREAT for eliminating transactional inefficiency … and certainly there’s some of that in real estate brokerage.  But 50 percent?  Probably not.

The bulk of inefficiency in real estate transactions is the HUMAN component of the negotiation.  The art of the deal.

The skill-set of a great agent is that of uncovering and understanding the unique circumstances of the property …

… AND the unique needs, wants, desires, goals, and objectives of at least two (sometimes there’s family, advisors, and other influencers involved) very different principals …

… and then negotiating through the extremely non-binary thoughts and emotions of both sides.   And then, ultimately, getting a deal done.

This is why a SKILLED negotiator can get a GREAT deal.

So we don’t think there’s an app for that … nor will there be anytime soon because computers don’t do empathy very well.

Just ask anyone who’s called in to an automated attendant.

So while tech people bark up the wrong tree trying to solve the “problem” of transactional inefficiency in real estate brokerage …

… Main Street investors are busy CAPITALIZING on the opportunities created by the true cause of brokerage inefficiency …

Real estate is not a commodity and brokerage is not about transactions. 

Just like the properties and people involved, EVERY single transaction is unique … and full of drama.  Get used to it.

But that’s why real estate is both fun and profitable for those with the skills and temperament to embrace it for what it is.

Until next time … good investing!