$30 million real estate portfolio goes on market in Santa Rosa

A cluster of office buildings in the shadow of Santa Rosa Memorial Hospital has been placed on the market as part of a potential $30 million deal that could influence the hospital’s expansion plans and reshape one of the central hubs for medical services in Sonoma County.

St. Joseph Health, which operates Memorial Hospital, is one of several bidders that have put in proposals to buy the properties. Others who have expressed interest in the 6-acre portfolio include institutional health care investors, developers and entrepreneurial investors, said Evan Kovac, managing director of health care capital markets for Newmark Grubb Knight Frank, or NGKF, a global real estate advisory firm hired to market the properties.

St. Joseph is constantly exploring opportunities to invest in land around Memorial Hospital, said Todd Salnas, president of St. Joseph Health in Sonoma County. Owning the property, as opposed to leasing it, gives the system greater flexibility and is more cost-effective for the long term, he said.

“The health care landscape is changing dramatically, and as a result, we’re constantly looking to expand our health care services beyond the walls of the hospital,” Salnas said. “Investment in property proximal to our campus gives us flexibility to design health care to meet the community’s needs into the future.”

The real estate portfolio, owned by a group of doctors with ties to the former Redwood Regional Medical Group, includes eight properties in Santa Rosa and two near hospitals in Petaluma and Ukiah. All of the Santa Rosa properties are located on Sotoyome Street, directly across Montgomery Drive from Memorial Hospital.

The properties were put on the market in mid-October, seven months after a group of physicians from Redwood Regional Medical Group joined Annadel Medical Group, a physicians group that is affiliated with St. Joseph Health. Annadel’s business operations are managed by St. Joseph through its medical practice foundation known as St. Joseph Heritage Healthcare.

As a result of the merger, more than half of the leases associated with the portfolio of office buildings now are held by St. Joseph or Annadel Medical Group.

The principal property in Santa Rosa, located at 121 Sotoyome St., has 34,047 square feet of building space on 128,938 square feet of land zoned for commercial office space. It is leased to St. Joseph through 2019 and is being utilized for outpatient multi-?specialty and radiology services.

Combined, the 10 properties in Santa Rosa, Petaluma and Ukiah have 61,504 square feet of building space on 266,463 square feet of land, or 6.12 acres. The properties are currently 95 percent leased, according to NGKF.

NGKF said the entire portfolio of properties has the potential to house anywhere from 200,000 to 500,000 square feet of medical office buildings and health care facilities.

Kovac said NGKF hopes to attract offers of about $30 million, which reflects a 6 percent all-cash investor return.

“We are not sure yet where the price will shake out, or who the investor will be when we are said and done,” Kovac said.

NGKF has received several proposals, aside from St. Joseph’s, in a first round of investor bidding. Select buyers likely will be invited to a best and final round, Kovac said.

St. Joseph spokeswoman Katy Hillenmeyer said the health care provider and the physician owners had “informal conversations” about the intent to sell the properties. But St. Joseph did not make a formal bid for the properties until after NGKF put out its request for proposals, Hillenmeyer said.

Salnas said St. Joseph’s master plan includes buildings with physician offices, ambulatory and outpatient services, laboratory services, radiology and rehabilitation services, among others. He said he could not get into specific details about the proposal St. Joseph submitted.

“We’re looking right now at continuing to develop our master planning for not only the hospital, but also for the integrated delivery system that we’re developing,” he said.

Salnas said St. Joseph’s expansion plans must take into account the changing landscape of health care, which is shifting away from inpatient care toward more outpatient services, wellness and prevention programs.

Kovac said it’s a favorable time for sellers in the market for health care properties. Four or five years ago, health care properties were considered a secondary market, he said. But since 2008 and 2009, health care properties have proved to be one of the most resilient types of real estate, despite the recession.

Traditional real estate markets, such as general office space and retail, saw spikes in vacancies during the recession. That didn’t happen with health care properties, Kovac said.

“The need for health care doesn’t decrease in a bad economy,” he said.

Demographics, with the aging baby boomer population requiring more health care services, also point to a sturdy market for health care real estate, he said.

“People over 65 see a doctor two times as often as younger people,” Kovac said.

You can reach Staff Writer ?Martin Espinoza at 521-5213 ?or martin.espinoza@press?democrat.com. On Twitter ?@renofish.