The Veterinary Boom

 

The Medical and Healthcare sector has been one of the more attractive asset classes over the last 12-24 months, largely in part to the sector’s resilience throughout the COVID-19 pandemic. We have been seeing capital flooding to the sector from property owners who historically owned industrial, retail, multi-family, and traditional office.  Across the country, we are seeing vacancy rates below 10% which give landlords incredible belief that the tenants in their buildings will be there for years to come. The low vacancy rate further shines a light on the stickiness of medical users and the longevity of tenants at a given location. While the entire sector has been seeing immense growth and capital infusion, we have noticed one specialty that is taking the country by storm and getting the attention of PE groups, REITS, Banks, and individual investors. That specialty is the veterinary space.

Why is the Vet space so hot?

Total spending for veterinary care in 2021 eclipsed $32 billion which was the largest amount spent in recent history. That comes largely in part to the roughly 20 million animals adopted during the COVID-19 pandemic. This new wave of pet owners has caused the veterinary space to thrive and expand from the small neighborhood vet to large established groups taking on new territories across the country. Many of these groups are growing organically from increased sales numbers while others are capitalizing on their real estate or taking outside investors to fund the growth. As a result of the millions of new pets and the need for additional veterinary and boarding care, many groups saw a great opportunity to get in on the action and help fund the growth of many successful operators into massive companies with large balance sheets.

Why buy real estate leased to a veterinary clinic?

Veterinary locations and boarding/grooming facilities have been extremely attractive to both private and institutional investors. There are many clinical specialties that can be done virtually but the veterinary/boarding space is not one of them. Investors are attracted to internet-resistant tenants and the fact that the space grew during a global pandemic furthers the affection for the space.

Additionally, these tenants are very sticky, in other words, once these tenants are comfortable with their space, they rarely leave. Most buildings are highly specialized for the use and moving the practice would result in a large financial burden on the practice. On top of the easily defined financial burden comes the risk of building a new client roster. Their well-being is based on loyal clients and word-of-mouth referrals. As most animal owners will vouch for, you usually take your pet to one location that is close to your home, and you never change unless the location closes. Operators are aware that their clients are convenience-oriented and moving locations will cause the practice to find an entirely new group of clients.

The above-mentioned factors are leading groups to focus on acquiring buildings leased to veterinary operators. Most investors are focused on the practice (and its primary discipline), its clientele, and overall financial stability when it comes to this sector as the desire for the tenant/credit supersedes the need to own in a specific market. What we are seeing, in terms of transaction volume is just the tip of the iceberg for the veterinary space. We continue to see new groups allocate capital to the sector and we do not see this slowing down for years to come.