Case Study: South Lamar Medical Center

We at BCP are value investors looking for assets trading at a discount to their intrinsic value, often due to temporary market dislocations. In the case of South Lamar Medical Center, BCP recognized the opportunity to capitalize on the significant discounts present in the traditional office market and the lack of supply for well-located medical office in Central Austin. Our performance-based model requires patience, discipline, and conviction as we primarily select off-market investments that provide a significant margin of safety to our investors. We are never investing solely based on a rising tide market dynamic.

Highlights

• Acquisition of a vacant 110K SF former retail/office building for renovation and repositioning for medical office use.
• Extremely competitive purchase price with a total project cost basis, including property improvements and carry cost, at a 70%+ discount to replacement cost for comparable product at this location.
• Investment benefited significantly from a same-day concurrent close with a 31K SF medical surgery center and a 10K SF dermatology clinic. This sale of almost 40% of the total SF significantly reduced the total project cost basis.

The Opportunity

BCP South Lamar, LP acquired a 110,296 SF office building June 7th, and on the same day recorded a condominium regime and sold 41K SF to Austin Gastroenterology and Southwest Dermatology and Vein Clinic at a 40% pricing discount off market pricing.  South-Central Austin is a highly competitive market for medical purchasers, and both users had actively been seeking ownership opportunities in the market for over two years. The renovated 4544 South Lamar, rebranded as South Lamar Medical Center, is strategically located adjacent to the West Gate Central Market and Brodie Oaks Center, providing ownership opportunities for those needing convenient access to Westlake, Circle C, South Austin, and the South Austin St. David’s Hospital. Given the vast number of parties involved in completing a 4-party transaction involving the seller, BCPas buyer and seller, and the two condo buyers (each with independent legal counsel and lenders), this was a complicated and rewarding transaction to coordinate.

We approached this repositioning opportunity with a high degree of confidence due to four primary factors:

Premier Location for Medical Office In A Supply Constrained Submarket

‍South Lamar Medical Center offers medical tenants second-to-none access and visibility in supply constrained south/central Austin. At the intersection of two major transportation arteries, the location caters to a large pool of potential tenants looking to offer a convenient and well amenitized location south of Downtown Austin.

Beyond its current setting at the confluence of multiple major transportation arteries near downtown, the property also benefits from its location adjacent to Austin’s largest commercial redevelopment project, “Brodie Oaks”. The Brodie Oaks redevelopment is a $1+ Billion plan to reimagine the declining Brodie Oaks shopping center into Austin’s preeminent example of high-density, mixed-use development.

Extremely Competitive Cost-Basis

Prior to the repositioning of the property, it was a former ATT Call Center that had been marketed by multiple real estate firms for well over a year with no success given the continued struggles the office market has been plagued by. The post-Covid office market provided a window for Ownership, a joint venture between Buchanan Capital Partners and B3 Commercial, to purchase the building at reduced pricing which they are extending to buyers. Ownership is extending a 35% discount off market pricing for the first wave of buyers, representing a potential savings of $2M for a 10,000SF user.  

South Lamar Medical Center is offering new purchasers looking to join Austin’s new medical hub a renovated and well-amenitized location for $335/SF, inclusive of all the forementioned exterior improvements. Recent medical office sales in the immediate area range from $500-$537/SF, reflecting both the demand and the limited options available to buyers. The most recent medical office sale with an equivalent location closed thisFebruary for $500+/ SF and will require an additional $50-$100/SF of exterior improvement, pulling the total pricing to $550+/SF.  

Concurrent Sale Of 40K+ SF To Two Purchasers-In-Tow

Same-day sale of 41,436 SF (38.3% of total SF) to two well-capitalized purchasers-in-tow as the anchor buyers, significantly reducing the total project basis. BCP would not have pursued this opportunity without lead condo buyers.

BCP will use the sale proceeds from these same day closings to fund the renovation of the property. The building improvements will serve to reposition the former retail/office space to medical use with a modern health and wellness aesthetic. Improvements include improvements include a new roof, complete redesign of the façade, new monument and building signage, new native landscaping, full parking resurfacing, and upgraded electrical infrastructure.

Strength Of Medical Office

• Meeting Demand In A Growing Sector: The aging demographic has triggered an exponential surge in the need for diverse healthcare services. As a result, medical office buildings hosting specialty care, primary care, and various rehabilitative services have become pivotal in meeting this escalating demand.This demand, when combined with centrally located, easily accessed sites presents a strong opportunity to acquire prime real estate at a steep discount.
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• Resilience In Performance: Amid economic fluctuations, the performance of healthcare-related real estate has stood firm. The sector showcased its resilience during the Global Financial Crisis (GFC), navigated through the challenges of the pandemic, and continues to thrive in the current capital environment. Comparing loan defaults across different asset types highlights the stability of medical offices, a reassuring sign for investors seeking security in their portfolios.
  
  
• Trends Shaping the Market: With high office vacancy in and around Austin’s CBD, now more than ever medical office buyers are well positioned to secure well-located, easily accessible locations at a steep discount. Fundamentals in the medical office sector remain robust. Occupancy rates are on an upward trajectory in Austin, outpacing the supply as construction levels decrease quarter over quarter. The high construction costs further amplify the value of existing medical spaces, exerting upward pressure on rents for second-generation spaces.

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