The Basics of Veterinary Real Estate
The Basics of Veterinary Real Estate
Whether you’re a regular on our website, you heard about us online (such as this mention on Wealth Management), or you’re just looking to learn the basics of Veterinary Real Estate, you’re in good hands. We sell more veterinary real estate than any other brokerage in America, which gives us industry knowledge we can pass on to you. Keep in mind that the value of your veterinary hospital real estate is specific to your goals. Your situation and priorities will dictate whether selling your property at this time is a good option for you. We often find that educating owners on the industry helps them better evaluate if they should sell out-right, enter into a 1031 tax-deferred exchange, or hold their property.
In this article, we’re going to cover the state of the industry and what determines the value of a property occupied by a Veterinary Hospital. While the context mentioned is similar in overseas markets, this applies mainly to the state of veterinary medicine in North America. The information that follows applies to all veterinary real estate, but is most directly applicable to Veterinary Practices occupied by a corporate tenant (NVA, VCA, etc.).
An Introduction to the World of Corporate Veterinary Hospitals
If you know any veterinarians that work for a private hospital or you are one yourself, you might have heard rumblings of corporate consolidation. Some estimates say that only around 12% of veterinary practices are corporately owned, but finding an accurate figure for the actual percentage of corporately owned hospitals is difficult to determine. Nonetheless, there are now over 60 consolidation groups, the largest of which (Mars Veterinary Health) owns Banfield, BluePearl, VCA, and 7 other pet health companies. Corporate interest in pets isn’t going anywhere, either; the aforementioned corporate giant acquired Royal Canin (in the form of a majority stake), Greenies, Iams, Nutro, and NomNomNow in the last two decades.
So why are corporations and private equity so confident that veterinary medicine is a safe investment? One of the many reasons is the rapid growth of the Pet Care Market, which is expected to reach $236.16 billion by 2030. Another reason for this confidence is that pet ownership has increased in prevalence among the current generation of young adults compared to the previous generation.
While the impact of corporate consolidation on veterinary medicine is still yet to be seen in its entirety, we do have a pretty good idea of how it has influenced the real estate side of things. From a buyer’s point of view, a corporate tenant, ideally with a corporate guarantee on the lease, provides assurance that they won’t have to scramble to lease the space. In turn, an experienced broker can assess a higher value for the property.
What Determines the Value of a Vet Hospital’s Real Estate?
As principal buyers and acquisition groups grow increasingly savvy, they now recognize a list of factors that play into the value of a property. Here we will cover where this value comes from and what those factors are. We don’t want to keep you all day, so here are the big 3 categories:
Location, Location, Location
To most investors, this section is the most straightforward. When we say “the property,” we mean the land (parcel) and building(s) on it. Here, the typical variables come into play when determining value. First and foremost, the building and properties themselves. A newer, nicer building typically fetches a higher price. But regardless of the building’s age, well-built construction with structural elements that are meant to last (concrete walls, metal roof, etc.) also show well. Prospective buyers will also look at the improvements they will be responsible for, as that could eat into their cash-flow. If the landlord is responsible for the replacement of roof, structure, and HVAC, the age and condition of these items will play a big part in the closing of a deal. For the parcel of land itself, its size and location are the main aspects that contribute to value.
The current state of veterinary medicine tells us a few things about the intentions of tenants, especially corporate tenants. Considering the nationwide shortage of veterinarians, there are certain situations where it makes more sense to relocate veterinarians to nearby practices rather than occupy both hospitals. Talking with a broker that has relevant experience and industry connections can help you determine whether or not one of these situations might be applicable to your property.
Sometimes, owners have multiple Vet Hospitals and are looking to diversify their investment portfolio by selling some (or all) of them. Vet Hospital Portfolios can be a good way to list multiple properties at once and roll a variety of investments into one transaction. However, this is typically a case-by-case judgment call and an experienced Veterinary Real Estate Broker can advise you on whether or not trading a portfolio would be in your best interest. However, a good agent will tell you that any financial decision is ultimately up to what is best for you and your family. Consulting a financial advisor is always recommended.
The type of tenant occupation will attract a specific type of buyer. Some buyers like larger, subdivided buildings (like strip malls) with an extensive rent roll while others prefer a free-standing, single tenant property. If you’re looking for veterinary real estate listings similar to your property, feel free to browse our Listings Page. You might even see a listing for sale near you.
The value of a property is usually expressed as a Cap Rate (capitalization rate). This is calculated using the NOI of the property in question. Cap Rates represent the risk of an investment. A higher capitalization rate represents a lower relative price, which some might see as a “good deal,” but it might also imply that there are risks associated with the purchase of the property. Some examples of risks would be a small amount of time left on the tenant’s current term, improvements needed on the property that the landlord is responsible for, or if the practice isn’t performing well and it doesn’t make sense for the tenant to remain. Cap rates (and thus market rates) are also influenced by lending rates at the time of sale. Prospective buyers that need to borrow money to acquire the property have to make a spread between what they owe on the borrowed money and the income that the property generates.
Buyers understand that rent is rarely a stagnant number. They expect for the lease to state the amount and frequency that rent will increase. In the veterinary industry, 2-3% annual increases and block increases (something like 10% every 5 years) are most common. Leases without increases will see that reflected in what the property is worth on the open market.
The lease of the occupying animal hospital is crucial in determining the value and marketability of a property. A lease’s remaining term and options to extend tell a buyer whether the current tenant is committed to the property. In the vet real estate space, low cap rate deals typically have ten or more years remaining on their initial term with multiple options to extend. Another way to indicate commitment to the property is whether or not the lease includes a corporate guarantee. This is where the strength of the corporate tenant (expressed as the amount of practices they have or corporate-level financials) comes into play and helps determine the risk attached to buying the vet hospital’s real estate.
Like in all corporate real estate acquisitions, landlord responsibilities also help dictate the type of buyer that will be interested in the property. Passive investors look for triple net or absolute triple net deals. Common landlord responsibilities in vet hospital ownership are a minimum of roof and structure, but can vary greatly. This is where having a broker that is experienced in the space is beneficial. Leases can be complex and even contradictory and involving a party that has the know-how for resolving these matters makes all the difference.
Location, Location, Location
Depending on the priorities of the buyer, they might be looking for something close to them, a property in a tax-averse state, or something else. Buyers also look at the demographics of the surrounding population. Key factors to consider are population, average household income, and projected insights. How much these factors contribute to the safety of a vet hospital real estate investment varies from practice to practice.
Like most retail tenants, the subject property’s value will also increase if it has good visibility in a high-traffic area. Accessibility to the property is also considered (is there street-level access or do you have to drive down a dirt road to get to the practice). If you’d like to know a little more about how each of these factors applies to your practice, we can provide a valuation for you.
Still Have Questions About Veterinary Real Estate?
While the landscape of real estate and veterinary properties is ever-changing, these factors will always be a good place to start when assessing a hospital’s value. If you’re looking for additional guidance to sell your property, we encourage you to reach out to us at The Wine Group.