FRESENIUS MEDICAL CARE | INDIANAPOLIS MSA › d2 › ...Fresenius Medical Care is the World’sLargest Provider of Products and Services for Renal Diseases, servicing over 320,000

FRESENIUS MEDICAL CARE | INDIANAPOLIS MSA2500 Parkway Drive • Shelbyville, IN 46176

Offering Memorandum

N O N - E N D O R S E M E N T A N D D I S C L A I M E R N O T I C E

Confidentiality and DisclaimerThe information contained in the following Marketing Brochure is proprietary and strictly confidential. It is intended to be reviewed only by the party receiving it from Marcus & Millichap and

should not be made available to any other person or entity without the written consent of Marcus & Millichap. This Marketing Brochure has been prepared to provide summary, unverified

information to prospective purchasers, and to establish only a preliminary level of interest in the subject property. The information contained herein is not a substitute for a thorough due

diligence investigation. Marcus & Millichap has not made any investigation, and makes no warranty or representation, with respect to the income or expenses for the subject property, the

future projected financial performance of the property, the size and square footage of the property and improvements, the presence or absence of contaminating substances, PCB's or

asbestos, the compliance with State and Federal regulations, the physical condition of the improvements thereon, or the financial condition or business prospects of any tenant, or any

tenant's plans or intentions to continue its occupancy of the subject property. The information contained in this Marketing Brochure has been obtained from sources we believe to be

reliable; however, Marcus & Millichap has not verified, and will not verify, any of the information contained herein, nor has Marcus & Millichap conducted any investigation regarding these

matters and makes no warranty or representation whatsoever regarding the accuracy or completeness of the information provided. All potential buyers must take appropriate measures to

verify all of the information set forth herein. Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc. © 2018 Marcus & Millichap. All rights reserved.

Non-Endorsement NoticeMarcus & Millichap is not affiliated with, sponsored by, or endorsed by any commercial tenant or lessee identified in this marketing package. The presence of any corporation's logo or

name is not intended to indicate or imply affiliation with, or sponsorship or endorsement by, said corporation of Marcus & Millichap, its affiliates or subsidiaries, or any agent, product,

service, or commercial listing of Marcus & Millichap, and is solely included for the purpose of providing tenant lessee information about this listing to prospective customers.

ALL PROPERTY SHOWINGS ARE BY APPOINTMENT ONLY.

PLEASE CONSULT YOUR MARCUS & MILLICHAP AGENT FOR MORE DETAILS.

FRESENIUS MEDICAL CARE

Shelbyville, IN

ACT ID Z0260273

2

TABLE OF CONTENTS

SECTION

INVESTMENT OVERVIEW 01Offering Summary

Regional Map

Local Map

Aerial Photo

FINANCIAL ANALYSIS 02

Tenant Summary

Lease Expiration Summary

Operating Statement

Notes

Pricing Detail

Acquisition Financing

MARKET OVERVIEW 03

Market Analysis

Demographic Analysis


3


4

INVESTMENT

OVERVIEW


#

OFFERING SUMMARY

5

EXECUTIVE SUMMARY

EXPENSES

CURRENT $/SF PRO FORMA $/SF

Real Estate Taxes $12,605 $2.12 $13,676 $2.30

Insurance $1,200 $0.20 $1,302 $0.22

Management Fees $4,385 $0.74 $4,938 $0.83

Total Expenses $18,356 $3.06 $19,916 $3.35

VITAL DATA

CURRENT PRO FORMA

Price $1,325,000 CAP Rate 7.23% 7.92%

Down Payment 30% / $397,500 Net Operating Income $95,824 $104,881

Loan Amount $927,500 Net Cash Flow After Debt Service 7.36% / $29,274 9.64% / $38,331

Loan Type Financed Total Return 11.77% / $46,768 15.02% / $59,689

Interest Rate / Amortization 5.00% / 25 Years

Rentable SF 5,940

Price/SF $223.06

Year Built 2004

Lot Size 0.62 acre(s)

THE OFFERING

Property Fresenius Medical Care

Price $1,325,000

Property Address 2500 Parkway Drive, Shelbyville, IN

Assessors Parcel Number

73-11-03-300-001.000-002

CONSTRUCTION

Foundation Concrete Slab

Roof Pitched Shingle

Parking Surface Asphalt

SITE DESCRIPTION

Number of Floors One (1)

Year Built/Renovated

2004

Rentable Square Feet

5,940

Ownership Fee Simple

Lot Size 0.82 Acres

Parking Spaces 32 Free Surface Spaces

Topography Flat

Highway Access I-74

PROPERTY PHOTO


6


OFFERING SUMMARY

▪ 2004 Build-To-Suit STNL Fresenius Dialysis Clinic | Shelbyville, IN | Indianapolis

MSA

▪ Executed 5-Year Lease Extension a Full Year Early | Zero Rent Reductions

▪ Strategically Located Less than 1-Mile from I-74 and SR 44 Interchange | 38,000+

VPD

▪ 12 Station Clinic |Operates on both the M-W-F and T-TH-Sat Schedules

▪ True NNN Structure Provides Limited Landlord Responsibilities

INVESTMENT HIGHLIGHTS

The DiSalvo Group of Marcus & Millichap is pleased to exclusively present to the market the Fresenius Dialysis Clinic of Shelbyville, Indiana. As the county seat of Shelby

County, Shelbyville is an integral part of the Indianapolis MSA. The 5,940 square-foot Subject Property was originally a build-to-suit project for Fresenius in 2004 and is

strategically positioned less than one mile from the I-74 and State Road 44 interchange, benefiting from daily traffic counts exceeding 38,000 vehicles per day.

The Fresenius Dialysis Clinic of Shelbyville, Indiana, is the only Fresenius facility within an 18 mile radius, and operates all 12 stations on both the Monday-Wednesday-

Friday and Tuesday-Thursday-Saturday rotations. Due to high demand, Fresenius recently executed their lease 5 year lease extension nearly a full year early, while also

converting to a true NNN basis and without any rent reductions. In exchange for the early lease extension, the Seller will repair, reseal, and restripe the parking lot, and

completely replace all 3 HVAC units prior to delivery to any new owner.

Fresenius Medical Care is the World’s Largest Provider of Products and Services for Renal Diseases, servicing over 320,000 Patients across 150 Countries, and

represents a Standard & Poor’s BBB- National Credit Rating. Fresenius Medical Care North America, the parent company of the Subject Property, services over 190,000

patients across nearly 2,400 US locations. With just under 6 years remaining on the NNN Lease, the subject property is offered to market at $1,325,000, which reflects a

7.23% CAP Rate, or a 7.55% Blended CAP Rate through 2023.

INVESTMENT OVERVIEW

7

PROPERTY PHOTO


8

AERIAL PHOTO


9

LOCAL MAP


10

REGIONAL MAP


11


12

FINANCIAL

ANALYSIS

FINANCIAL ANALYSIS


OPERATING STATEMENT

13

12

TENANT PROFILE


14


General Information

Website https://fmcna.com/

Headquartered Bad Homburg, Germany

Rentable Square Feet 5,940

Percentage of RBA 100%

Lease Commencement September 1, 2009

Lease Expiration August 31, 2024

Fresenius Medical Care & Co, a kidney dialysis company, provides dialysis care services related

to the dialysis treatment a patient receives with end stage renal disease and other health care

services. It offers dialysis treatment, and related laboratory and diagnostic services through a

network of 3,579 outpatient dialysis clinics in approximately 45 countries worldwide; materials,

training, and patient support services comprising clinical monitoring, follow-up assistance, and

arranging for delivery of the supplies to the patient’s residence; and dialysis services under

contract to hospitals in the United States for hospitalized ESRD patients and for patients

suffering from acute kidney failure.

The company also provides pharmacy services, such as delivery and supply of renal medication

to patients at home or to dialysis clinics directly; vascular, cardiovascular, and endovascular

specialty services; and offers products for the treatment of ESRD. In addition, it offers laboratory

services that include blood, urine, and other bodily fluid testing services; and hemodialysis (HD)

machines, modular components for dialysis machines, polysulfone dialyzers, bloodlines, HD

solutions and concentrates, needles, connectors, machines for water treatment, data

administration systems, dialysis chairs, phosphate binders, iron products, and other renal drug

products.

Further, the company provides peritoneal dialysis system and solutions for continuous

ambulatory peritoneal dialysis and automated peritoneal dialysis; and absorbers, which are filters

used in other extracorporeal therapies; and distributes specific instruments for vascular access,

as well as other supplies, such as bandages, clamps, and injections.

The company sells its products to clinics, hospitals, and specialized treatment clinics through

local sales forces, independent distributors, dealers, and sales agents. The company was

founded in 1996 and is headquartered in Bad Homburg, Germany.

TENANT SUMMARY

Rent Schedule

YearMonthly

RentRent/SF

Annual Rent

Rent/SF

Sep-18 $7,956.12 $1.34 $95,473.44 $16.07

Sep-19 $8,043.75 $1.35 $96,525.00 $16.25

Sep-20 $8,246.70 $1.39 $98,960.40 $16.66

Sep-21 $8,454.60 $1.42 $101,455.20 $17.08

Sep-22 $8,667.45 $1.46 $104,009.45 $17.51

Sep-23 $8,885.25 $1.50 $106,623.00 $17.95

Reimbursements

CAM / Utilities

Taxes Insurance MGMT

- $12,605 $1,200 $4,385

MARCUS & MILLICHAP CAPITAL CORPORATION

CAPABILITIES

MMCC—our fully integrated, dedicated financing arm—is committed to

providing superior capital market expertise, precisely managed execution, and

unparalleled access to capital sources providing the most competitive rates and

terms.

We leverage our prominent capital market relationships with commercial banks,

life insurance companies, CMBS, private and public debt/equity funds, Fannie

Mae, Freddie Mac and HUD to provide our clients with the greatest range of

financing options.

Our dedicated, knowledgeable experts understand the challenges of financing

and work tirelessly to resolve all potential issues to the benefit of our clients.

National platform

operating

within the firm’s

brokerage

offices

$5.63 billion

total national

volume in 2017

Access to

more capital

sources than

any other firm

in the industry

Optimum financing solutions

to enhance value

Our ability to enhance

buyer pool by expanding

finance options

Our ability to enhance

seller control

• Through buyer

qualification support

• Our ability to manage buyers

finance expectations

• Ability to monitor and

manage buyer/lender

progress, insuring timely,

predictable closings

• By relying on a world class

set of debt/equity sources

and presenting a tightly

underwritten credit file

WHY MMCC?

Closed 1,707

debt and equity

financings

in 2017

ACQUISITION FINANCING


15


16

MARKET

OVERVIEW

MARKET OVERVIEW

INDIANAPOLISOVERVIEW

17

The Indianapolis metro houses the state capitol and is a growing tech

hub. Situated in central Indiana, the market consists of 11 counties:

Marion, Johnson, Hamilton, Boone, Hendricks, Morgan, Hancock,

Shelby, Brown, Putnam and Madison. The metro lacks formidable

development barriers, except for the several rivers and creeks that

traverse the region. Marion County is home to Indianapolis, which

contains a population of approximately 859,200 people. Carmel in

Hamilton County is the second most populous with more than 91,000

residents. A large portion of the surrounding counties are rural,

offering builders ample land for residential and commercial

development. Population growth is primarily concentrated to the

northern suburbs and west of the city.

MARKET OVERVIEW

METRO HIGHLIGHTS

PREMIER DISTRIBUTION HUB

Around 50 percent of the U.S. population lies within

a one-day drive of Indianapolis, making it a center

for the transportation of goods.

MAJOR HEALTH SCIENCES CENTER

Eli Lilly & Co., Roche Diagnostics Corp. and

Covance Inc. maintain operations in the region,

among other major health-related employers.

LOW COST OF DOING BUSINESS

Indianapolis’ costs are far below national averages,

attracting businesses and residents to the area.


MARKET OVERVIEW

ECONOMY▪ Indianapolis’ economy has diversified from manufacturing into a variety of other industries,

including a growing tech sector underpinned by Salesforce.com.

▪ The metro is one of the key health-sciences centers in the nation, anchored by several

pharmaceutical and life-sciences companies including Ely Lilly and Roche Diagnostics.

▪ The metro is accessible to a large portion of the nation in one day by ground or air, making

the region a burgeoning logistics and distribution hub.

▪ Annual GMP growth rate tops the national level, a trend that is set to persist next year.

SHARE OF 2017 TOTAL EMPLOYMENT

MAJOR AREA EMPLOYERS

Eli Lilly & Co.

Indiana University Health

Rolls-Royce Corp.

Community Health

Cummins

Kroger

IUPUI

FedEx

Roche Diagnostics

Finish Line* Forecast

18

MANUFACTURING

9%GOVERNMENT

HEALTH SERVICES

EDUCATION AND

+OTHER SERVICES

4%

LEISURE AND HOSPITALITY FINANCIAL ACTIVITIES

21%

AND UTILITIES

TRADE, TRANSPORTATION CONSTRUCTION

PROFESSIONAL AND

BUSINESS SERVICES

1%INFORMATION

15%

5%

12% 10% 7%

15%


MARKET OVERVIEW

DEMOGRAPHICS

SPORTS

EDUCATION

ARTS & ENTERTAINMENT

▪ The metro is expected to add nearly 118,100 people through 2022, which will result

in the formation of nearly 52,000 households, generating demand for housing.

▪ A median home price below the national level has produced a homeownership rate

of 65 percent, which is slightly above the national rate of 64 percent.

▪ Roughly 31 percent of people age 25 and older hold bachelor’s degrees; among

those residents, 11 percent also have earned a graduate or professional degree.

Indianapolis offers residents many big-city amenities in an affordable, small-town

atmosphere. The city is home to several high-profile auto races, including the Indianapolis

500 and Brickyard 400. Races are hosted at the Indianapolis Motor Speedway and the

Lucas Oil Raceway at Indianapolis. The metro has two major league sports teams: the

Indianapolis Colts (NFL) and the Indiana Pacers (NBA). The area also has a vibrant cultural

and arts scene, with more than 200 art galleries and dealers, the Indianapolis Symphony

Orchestra and a variety museums, including the Eiteljorg Museum of American Indians and

Western Art. Additionally, the Children’s Museum of Indianapolis is one of the largest

children’s museums in the world.

QUALITY OF LIFE

19

2017 Population by Age

0-4 YEARS

7%5-19 YEARS

21%20-24 YEARS

6%25-44 YEARS

28%45-64 YEARS

26%65+ YEARS

13%

* Forecast

Sources: Marcus & Millichap Research Services; BLS; Bureau of Economic Analysis; Experian; Fortune; Moody’s

Analytics; U.S. Census Bureau


36.4

2017MEDIAN AGE:

U.S. Median:

37.8

$55,600

2017 MEDIAN HOUSEHOLD INCOME:

U.S. Median:

$56,300

2M

2017POPULATION:

Growth2017-2022*:

5.8%

779K

2017HOUSEHOLDS:

6.7%

Growth2017-2022*:

MARKET OVERVIEW

20

New businesses fuel growing office sector. Strong office-using employment gains

over the past 12 months have continued to improve the metro’s overall office market.

With large companies like Infosys expanding operations in central Indiana, market

vacancy has plummeted to an all-time low and to one of the tightest rates in the

nation. As a result, rent gains remain strong, pushing rental rates closer to $20 per

square foot, an average the metro has yet to reach. During the coming months, space

demand and rent growth should stay relatively robust, particularly in Carmel and

Fishers as well as downtown. Historically, out-of-state businesses have flocked to

these areas seeking relocation. This trend is expected to continue for the foreseeable

future, boding well for the performance of the office market.

Development pipeline to strengthen. Although most of the office space scheduled for

completion this year has already been delivered, construction in 2019 should

accelerate. Many developers remain interested in northern parts of the metro, but

some are looking to repurpose spaces in and around the urban core. For instance,

the proposed redevelopment of the former Bush Stadium would add 172,000 square

feet to inventory next year. This is in addition to 560,000 square feet proposed for

2019.

Tight Market Conditions, Strong Rent

Gains Serve as Basis for Investment

INDIANAPOLIS METRO AREA

* Cap rates trailing 12 months through 1Q18; 10-Year Treasury up to March 29

Sources: CoStar Group, Inc.; Real Capital Analytics

Investment Trends

Office 2018 Outlook

280,000 sq. ft. will be

completed

4.7% increase in

asking rents

60 basis point

decrease in vacancy

Construction:

Rents:

Vacancy:

Deliveries slow down in 2018 after three

straight years of at least 650,000 square feet

of office space completed.

Strong rent gains in Downtown Indianapolis

help boost the metro’s average asking rent

to $19.99 per square foot, about $10 below

the national rate.

As office development eases this year,

market vacancy will decrease 60 basis

points to 10.2 percent. Last year, the rate

slid 160 basis points.

• Neighborhoods just east of Downtown Indianapolis were areas of emphasis

for investors, as assets here provide value-add opportunities. Private

investors zeroed in on these properties due largely to low entry costs,

supporting the potential for significant returns following renovations.

• Aside from several trades in and around the urban core, the majority of sales

took place in outer-ring submarkets. Listings in these parts garnered interest

from a handful of local investors as well as East Coast buyers, seeking

relatively new construction and cap rates that may dip into the low-6 percent

range. Assets in neighborhoods around the Fashion Mall at Keystone were

especially sought after.

• Over the past year, average initial yields increased 30 basis points to 8.1

percent. Cap rates for Class B properties rose considerably to 7.9 percent

during the same period.


MARKET OVERVIEW

21

• Over the past year, Indianapolis

businesses added 18,800

workers, with about one-third of

that total consisting of office-

using employees. The roughly

5,800 people staffed in the

professional and businesses

services sector aided the strong

employment gain.

• The unemployment rate dropped

40 basis points since March 2017

to 3.0 percent.

EMPLOYMENT

• In the past four quarters,

development accelerated from

the 540,000 square feet

delivered during the prior

period. In the first quarter of

2018, 262,000 square feet was

completed.

• North County logged the most

construction largely due to the

137,000-square-foot Allied

Solutions headquarters

completed in the Carmel Arts

& Design District.

CONSTRUCTION

• Net absorption of roughly 1.3

million square feet supported

a substantial vacancy drop,

driving the rate down to 10.6

percent. This follows the 110-

basis-point slide recorded in

the previous 12 months.

• Even with a considerable

amount of development in

outer-ring submarkets,

suburban vacancy decreased

140 basis points year over

year to 11.4 percent.

VACANCY

• Rent growth in Indianapolis

reached its highest point in

more than a decade as the

average asking rent rose to

$19.19 per square foot.

• Rejuvenation efforts in

neighborhoods slightly east of

the CBD led to significant rent

gains in the East County

submarket. Here, the average

asking rent climbed to $14.35

per square foot.

RENTS


increase in the

average asking rent

Y-O-Y

5.4%basis point decrease

in vacancy Y-O-Y80square feet

completed

Y-O-Y

728,000increase in total

employment Y-O-Y1.8%

* Forecast

1Q18 - 12-Month Trend


MARKET OVERVIEW


22


Inflow of New Companies, Strong Employment

Growth Forge Demand for Downtown Space

Restrained construction supports vacancy dip. Amid a rapidly expanding tech sector, Indianapolis

registers considerable employment growth in 2018 compared with the rest of the nation. IT consulting, cloud

computing and biotechnology companies are a few of the specialties setting up shop in Indianapolis,

particularly downtown. Vacancy in the central business district slides below the 9 percent mark this year,

adding to the 250-basis-point drop since 2012. In contrast, suburban office vacancy posted a 50-basis-

point decrease over the last five years. While office completions have been limited, the majority of space

additions have occurred outside the city center, a trend that persists through 2018 and keeps suburban

office vacancy relatively in line with last year’s measure of 13 percent. In 2018, Indianapolis will recognize a

sharp drop in construction as the total is roughly one-third of last year’s sum. Carmel and Fishers receive

three-fourths of this development in the next 12 months, with the largest project being a 125,000-square-

foot building near the U.S. 31 and Keystone Parkway intersection.

Northern submarkets provide shoppers with high-yield options. As demand for office space continues

to strengthen, the metro’s rent growth outpaces the national rate in 2018. Investors flock to Indianapolis

seeking properties with potentially high revenue growth. Local buyers, as well as a handful from the East

Coast, place emphasis on properties in the Meridian Street corridor and east through Uptown Indianapolis.

Here, first-year yields average in the low-8 to low-10 percent range. Institutional investors remain focused

on Class A assets in northern Marion County, near Meridian Hills and into Hamilton County where a large

amount of commercial development is taking place. Buyers of this class also scour downtown Indianapolis

for properties approaching the $15 million range. These spaces offer initial returns around the 7 percent

mark.

* Forecast

Sources: Marcus & Millichap Research Services; BLS; CoStar Group, Inc.

MARKET OVERVIEW

23

Northern Submarkets Garner Investor Attention;

Office Valuations Continue Steady Climb

Outlook: Investor interest will continue to

shift from the CBD to outer-ring

submarkets as development intensifies

and demographic trends strengthen in

these areas.

Vacancy

Rate

Y-O-Y

BasisPoint

Change

SubmarketAsking

Rent

Y-O-Y%

Change

East County 5.6% 120 $14.35 30.6%

Far West Counties 7.1% -260 $15.35 0.1%

South County 7.4% 110 $18.93 -0.5%

Downtown 9.2% 20 $20.65 8.0%

West County 11.3% 130 $16.98 3.3%

North County 11.4% -280 $20.07 3.9%

Northeast County 12.3% -270 $19.31 1.5%

Northwest County 16.3% 170 $18.16 -0.1%

Far North Hamilton

County22.1% -220 $17.62 2.4%

Overall Metro 10.6% -80 $19.19 5.4%

Submarket Trends

Lowest Vacancy Rates 1Q18

Sales Trends


• Transaction velocity over the past four quarters stayed relatively consistent with the

prior yearlong period. Sales activity around the northern part of I-465 remained

especially strong.

• The average price per square foot increased 4.4 percent during the past year, pushing

the measure to $131. Class A properties traded for $154 per square foot on average

since March 2017.

* Trailing 12 months through 1Q18 over previous time period

Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics


* 2017

**1Q18

MARKET OVERVIEW

24

• Fed raises benchmark interest rate, plots path for additional increases. The Federal

Reserve increased the federal funds rate by 25 basis points, lifting the overnight lending rate

to 1.75 percent. The Fed noted that inflation has broadly reached its objective, while the

domestic economy is performing tremendously well as tax cuts power household spending

and corporate investment. As a result, the Fed has guided toward two additional rate hikes

this year, likely in September and December, while setting the stage for as many as four

increases in 2019.

• Lending costs rise alongside Fed rate increase. As the Fed continues to lift interest rates,

lenders are increasingly tightening margins in order to compete for loan demand. Despite

these efforts, borrowing costs remain on an upward trajectory, which may prompt investors to

seek higher cap rates or pursue greater returns in secondary markets. However, robust

economic growth and rising net operating incomes are keeping selling prices elevated, which

may widen an expectation gap as property performance and demand trends remain positive.

• Lending continues to be highly competitive. While the Fed has committed to tightening

policy, global markets and foreign central banks are keeping pressure down on long-term

interest rates, restraining the 10-year Treasury to the 3 percent range. Banks, commercial

mortgage-backed securities (CMBS) and life insurance companies are providing debt for

office assets, with leverage at banks typically capped at 65 percent. Meanwhile, life insurance

companies will typically provide capital with leverage between 60 and 65 percent, with CMBS

offering up to 70 percent. Lender spreads have narrowed in recent months, while 10-year loan

structures will typically range between 4.25 and 5.25 percent, depending on tenancy, location,

sponsorship and loan-to-value ratio. Minimum debt service coverage required is 1.3 times

expected asset revenues, supporting debt yields of 8.5 percent. The national economy should

grow strong and office demand should support a 10-basis-point decline in vacancy to 13.7

percent nationally.

Include sales $2.5 million and greater


ATLANTA METRO AREA

Capital Markets


MARKET OVERVIEW


25

Shifts Toward Outpatient Care Encourage Off-Campus Medical Office

Development; Investors Optimistic About Market Outlook

Industry consolidation prompts medical office development. Mergers among healthcare

companies and providers has been a driving force behind changes in the industry and how

physicians interact with patients. Emerging technologies and a shift in the care delivery model are

spilling over into the development of medical offices. A rise in outpatient services and procedures

has encouraged medical office development in off-campus locations over the past few years.

Hospitals and medical providers seek to place offices in neighborhoods and suburban areas,

closer to where people live and work, in order to reduce costs and appeal to patients seeking

medical care. While these factors bode well for today’s medical office market, the industry still

faces numerous challenges as an aging population is met with a physician shortage, rising

healthcare costs and insurance reform uncertainty. Despite these challenges, patient demand for

services remains strong and will continue to drive further expansion and growth in the medical

office building sector.

Advancing healthcare costs. Healthcare expenditures have risen at a hastened pace since 2014

and current projections place annual growth at an average near 5.5 percent through 2026. With

expenses rising faster than forecasted GDP growth, healthcare expenditures are expected to

make up nearly 20 percent of U.S. GDP by 2026, growing from 13.3 percent in 2000. In 2016,

healthcare expenditures surpassed $10,000 per capita.

Investment Highlights

▪ Recently completed single-tenant medical office assets remain in high

demand across both private and institutional buyer segments. Properties

with major medical providers or hospital systems backing leases trade at

a premium, with first-year returns averaging in the high-5 percent to low-

6 percent span.

▪ Sale-leaseback opportunities with private physician groups often require

personal guarantees of leases. Many physicians are bringing buildings to

market in order to cash in on increased equity as property values have

risen over the past few years. Investors will be mindful of lease terms and

are scrutinizing these deals closely as many buyers prefer the longer

lease guarantees that come with deals tenanted by a major hospital

system or healthcare group. Buildings tenanted by a private physician

typically trade 100 basis points above properties leased by major groups.

▪ Investors are seeking stabilized multi-tenant medical office properties in

primary and secondary markets. Yield spreads between on-campus and

off-campus assets have compressed over the past few years, with

private investors and institutions expecting similar returns regardless of

assets’ proximity to an established hospital.

* Forecast ** Trailing 12 months through 2Q

Sources: CoStar Group, Inc.; National Health Expenditure Accounts (NHEA)

MARKET OVERVIEW


26

Economic and Demographic Trends

▪ Healthcare employment gains have been some of the strongest over the past few years, with approximately

307,000 healthcare services positions added over the past 12 months. While total job growth posted losses during

the Great Recession, employment in the healthcare segment remained positive. Hiring among ambulatory care

services, which includes a range of physicians and general practitioners, has been the strongest at 27 percent

since 2009.

▪ The 65 and older population has grown at an annual pace greater than 3 percent since 2011. The age group is

anticipated to rise by 20 million people by 2028 and will comprise 20 percent of our nation’s population base.

▪ Hiring in healthcare services remains steady this year with the addition of nearly 300,000 positions, or growth of

2.0 percent. Though growth remains healthy this year, the potential for a future physician shortage and steadily

rising healthcare costs are facilitating changes and innovations in the healthcare industry that could restrain future

medical office space demand.

* Forecast

Source: CoStar Group, Inc.

MARKET OVERVIEW


27

Construction Trends

▪ Medical office developers completed nearly 4.1 million square feet of space in the first six months of the year, with

annual deliveries approaching 9.9 million square feet. The pace of deliveries slowed from the previous annual

period when 10.8 million square feet of space was added to stock.

▪ Developers continue to focus on off-campus locations for new medical office space as medical providers expand

services into neighborhoods and locations farther away from hospitals and major medical centers.

▪ The southern United States remains a target for developers with 3.8 million square feet of space coming online in

the Southeast and Southwest regions during the past 12 months. More than 1 million square feet of space also

came online in each of the Central Plains, Midwest and Pacific regions.

Vacancy and Rent Trends

▪ Vacancy in the property sector ticked up 10 basis points over the past four quarters to 8.2 percent, remaining near

a 10-year low. Nearly every region realized an increase in vacancy during the annual period, with the exception of

the Mountain region, where vacancy plummeted 60 basis points year over year to 11.1 percent.

▪ The average gross rent ticked up 0.9 percent since the middle of 2017, reaching $23.18 per square foot in the

second quarter. Consolidation within the healthcare industry is keeping pressure on rental rate growth. Two

regions recorded rent advancement of more than 3.0 percent over the past year, the Central Plains and the

Southeast.

▪ While the Central Plains recorded the lowest medical office vacancy rate in the country at 5.4 percent in the

second quarter, the highest rents are found in the Pacific. The region’s average gross rent reached $29.89 per

square foot during the past year, and six of the state’s major metropolitan areas boast some of the highest rental

rates in the U.S.

MARKET OVERVIEW

28

Source: CoStar Group, Inc.

Marcus & Millichap Medical Office Building Regions

Trailing 12 Months Through 2Q18


MARKET OVERVIEW

29

2018 Medical Office Building Forecast

Construction:

Medical office deliveries totaled nearly 11.3 million square feet during 2017, but completions taper slightly this year. The bulk of new

space comes online in the Southwest and Southeast regions, where 980,000 and 950,000 square feet of space is slated for delivery in

2018.

Vacancy:

The vacancy rate ticks up this year to 8.4 percent. The increase will be the first after eight consecutive years of vacancy declines.

Despite the uptick, the rate remains near the 10-year low of 8.0 percent achieved during 2017.

Asking Rent:

A slight increase in the average gross rent advances the rate to $23.05 per square foot this year. The average medical office rent has

yet to climb back to the peak rate achieved before 2009 but is now within 20 cents of the mean recorded during 2008.

40 basis point

decrease

10.7 million

square feet

1.0%

increase


MARKET OVERVIEW


30

Fed watchful as economic surge raises inflationary pressure. Strengthened hiring amid exceptionally low unemployment levels has boosted wage growth, placing upward

pressure on inflation. Amid this trend coupled with rising trade protectionism and tariffs, the Federal Reserve appears determined to head off inflation risk by continuing its

quarterly increases of the overnight rate. These actions are lifting short-term interest rates while the 10-year Treasury rate remains range bound near 3.0 percent. Should the 10-

year remain steadfast, Fed tightening could create an inverted yield curve in which short-term rates rise above long-term rates. Although this event has preceded every

recession of the past 50 years, many economists suggest such an inversion this year could be an exception to the rule. Because of distortions caused by regulatory changes

and quantitative easing, this inversion could be different. Nonetheless, the Fed’s stated path does raise recessionary risk levels because it could weigh on confidence levels and

restrain spending by consumers and businesses, thus slowing economic growth.

Lending market remains competitive as interest rates rise. Though interest rates are rising and cutting into investors leverage objectives, yield spreads for medical office

buildings are still favorable. Average medical office cap rates remain more than 400 basis points above the 10-Year Treasury rate, which could prompt additional investors to

seek assets in the property sector as they search for higher-yielding alternatives. Medical office interest rates currently reside in the mid-4 percent to mid-5 percent realm with

maximum leverage of 70 percent.

Potential rapid interest rate escalation a downside risk. Although capital remains plentiful, lending could tighten quickly for a short period if interest rates rise rapidly. As

experienced in late 2016 when the 10-year rose by more than 80 basis points in 60 days, and again at the beginning of 2018 when there was a 60-basis-point surge, market

liquidity could tighten if rates jump. Considering this has happened twice in the last two years, borrowers will likely benefit by taking a cautious approach with their lenders and

lock in financing quickly.

** Cap rate trailing 12-month average through 2Q;

Treasury rate as of June 28.


Capital Markets

MARKET OVERVIEW

PROPERTY NAME

MARKETING TEAM


DEMOGRAPHICS

Source: © 2017 Experian

Created on September 2018

POPULATION 1 Miles 3 Miles 5 Miles

▪ 2022 Projection

Total Population 2,679 19,506 24,942

▪ 2017 Estimate


▪ 2010 Census


▪ 2000 Census


▪ Current Daytime Population

2017 Estimate 2,601 20,439 26,016

HOUSEHOLDS 1 Miles 3 Miles 5 Miles

▪ 2022 Projection

Total Households 1,030 7,751 9,954

▪ 2017 Estimate

Total Households 884 7,521 9,632

Average (Mean) Household Size 2.49 2.48 2.48

▪ 2010 Census


▪ 2000 Census


HOUSEHOLDS BY INCOME 1 Miles 3 Miles 5 Miles

▪ 2017 Estimate

$200,000 or More 3.64% 1.49% 1.82%

$150,000 - $199,999 1.33% 1.13% 1.84%

$100,000 - $149,000 6.72% 8.23% 9.99%

$75,000 - $99,999 11.19% 10.84% 12.00%

$50,000 - $74,999 19.00% 20.75% 21.00%

$35,000 - $49,999 16.10% 15.93% 15.05%

$25,000 - $34,999 8.53% 13.65% 13.10%

$15,000 - $24,999 15.22% 12.70% 11.61%

Under $15,000 13.44% 14.88% 14.05%

Average Household Income $61,355 $54,630 $59,668

Median Household Income $43,778 $42,681 $46,088

Per Capita Income $23,772 $21,837 $23,931

POPULATION PROFILE 1 Miles 3 Miles 5 Miles

▪ Population By Age

2017 Estimate Total Population 2,281 18,981 24,261

Under 20 28.53% 26.71% 25.97%

20 to 34 Years 21.97% 21.22% 20.25%

35 to 49 Years 18.02% 18.71% 18.58%

50 to 59 Years 11.47% 13.77% 14.13%

60 to 64 Years 5.26% 5.50% 5.96%

65 to 69 Years 4.14% 4.37% 4.70%

70 to 74 Years 2.70% 3.12% 3.32%

Age 75+ 7.92% 6.62% 7.10%

Median Age 34.68 36.62 38.04

▪ Population by Gender

2017 Estimate Total Population 2,281 18,981 24,261

Male Population 48.49% 49.35% 49.18%

Female Population 51.51% 50.65% 50.82%

AVERAGE HEALTH CARE

EXPENDITURE1 Miles 3 Miles 5 Miles

▪ 2017 Estimate Total Expenditure

Percent of Total 15.88% 17.35% 17.04%

Health Care Insurance $2,496 $2,508 $2,702

Percent of Total 66.13% 66.20% 66.28%

Medical Services $786 $786 $846

Percent of Total 20.83% 20.74% 20.75%

Medical Supplies $121 $116 $125

Percent of Total 3.19% 3.06% 3.06%

▪ Percentage Change 2017-

Health Care Insurance 15.10% 16.27% 15.81%

Medical Services 15.48% 17.70% 17.01%

Medical Supplies 21.14% 23.02% 22.47%

31

MARKET OVERVIEW

Income

In 2017, the median household income for your selected geography is

$46,088, compare this to the US average which is currently $56,286.

The median household income for your area has changed by 17.48%

since 2000. It is estimated that the median household income in your

area will be $47,813 five years from now, which represents a change

of 3.74% from the current year.

The current year per capita income in your area is $23,931, compare

this to the US average, which is $30,982. The current year average

household income in your area is $59,668, compare this to the US

average which is $81,217.

Population

In 2017, the population in your selected geography is 24,261. The

population has changed by 4.40% since 2000. It is estimated that the

population in your area will be 24,942.00 five years from now, which

represents a change of 2.81% from the current year. The current

population is 49.18% male and 50.82% female. The median age of

the population in your area is 38.04, compare this to the US average

which is 37.83. The population density in your area is 308.47 people

per square mile.

Households

There are currently 9,632 households in your selected geography. The

number of households has changed by 3.50% since 2000. It is

estimated that the number of households in your area will be 9,954

five years from now, which represents a change of 3.34% from the

current year. The average household size in your area is 2.48 persons.

Employment

In 2017, there are 13,040 employees in your selected area, this is also

known as the daytime population. The 2000 Census revealed that

46.69% of employees are employed in white-collar occupations in

this geography, and 53.29% are employed in blue-collar occupations.

In 2017, unemployment in this area is 5.77%. In 2000, the average

time traveled to work was 23.00 minutes.

Race and Ethnicity

The current year racial makeup of your selected area is as follows:

91.80% White, 1.93% Black, 0.10% Native American and 1.31%

Asian/Pacific Islander. Compare these to US averages which are:

70.42% White, 12.85% Black, 0.19% Native American and 5.53%

Asian/Pacific Islander. People of Hispanic origin are counted

independently of race.

People of Hispanic origin make up 6.43% of the current year

population in your selected area. Compare this to the US average of

17.88%.

PROPERTY NAME

MARKETING TEAM


Housing

The median housing value in your area was $107,249 in 2017,

compare this to the US average of $193,953. In 2000, there were

5,946 owner occupied housing units in your area and there were

3,360 renter occupied housing units in your area. The median rent at

the time was $461.

Source: © 2017 Experian

DEMOGRAPHICS

32

MARKET OVERVIEW8


DEMOGRAPHICS

33

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