2019 Medical Office Building Transaction Volumes 50% Higher Than Pre-Recession

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Increasing interest from institutional investors has helped to push the medical office sector to hefty transaction volumes and steady occupancy despite record construction in the second quarter.

A new report from CBRE notes that US transaction volumes this year for medical office properties are 50% higher than their pre-recession levels. Meanwhile, medical-office capitalization rates – a measure of a property’s income as a percentage of its price – have pulled even with those of conventional offices after years of registering higher.

Much of the market’s momentum comes from demographic trends toward longer lifespans and more healthcare consumption as well as a medical-industry shift toward more outpatient care. CBRE defines medical offices as office buildings in which at least half of leasable space is occupied by medical uses such as dental, surgical or special practitioners and services.

GlobeSt.com caught up with Ian Anderson, CBRE’s head of Americas Office Research, for an exclusive interview about the report’s findings on the medical office sector. Here are excerpts from that conversation.

GlobeSt.com: What about the medical office sector is most appealing to institutional investors and why are they jumping into the sector now rather than years earlier?

Ian Anderson: Medical office buildings have been an attractive target for institutional investors for many years, but this current cycle has been unique in accelerating that trend. The current expansion has seen a dramatic transformation in the way commercial real estate is being used, and that sometimes has negatively affected demand for space. That’s particular true for conventional offices, for which demand is influenced by workplace strategies and densification, and for retail space, which is adapting to e-commerce. As a result, many institutional investors have been forced to seek new opportunities that offer attractive returns. This has caused a surge of interest into alternative commercial real estate investments where growth is more robust, such as life sciences lab space, self-storage, and co-living, among others.

Aside from the ‘push’ by investors into emerging, alternative commercial real estate investments, the ‘pull’ of deeply entrenched and highly attractive demand drivers is what is really driving demand for medical office space. Any investor seeking to capitalize on the demographic and consumption trends unfolding in the United States wants to have a position in medical offices. Underlying these megatrends, though, is the continued shift by healthcare systems to provide services in a lower cost setting that is more convenient to the consumer. In other words, allowing consumers to obtain healthcare services near to their home, rather than venturing to the main hospital of a healthcare system. Finally, though, medical office investment is driven by the income derived from these properties, which are frequently supported by a variety of tenants with abundant demand and a reluctance to move upon the expiration of their lease.

GlobeSt.com: What has fueled demand for medical office space in markets where it is strongest, namely Chicago, Atlanta, New Jersey and Nashville?

Ian Anerson: Demand for medical office space varies from market to market due to several reasons. In some instances, we observe higher net absorption – demand – simply as a result of the delivery of new medical office buildings in markets where it is easier to build. For example, there are more medical offices under construction and waiting to be occupied in the Inland Empire than Los Angeles, where it is more difficult to build. In other instances, there are local trends in the healthcare industry, such as a merger between healthcare systems, that may affect demand for space. But generally speaking, higher demand for medical office space by market results from a combination of favorable demographics, either in the form of a growing total population or an existing, abundant elderly population, supported by attractive and growing incomes.

GlobeSt.com: Given the strong trends driving the sector, why aren’t we seeing more construction of medical office buildings? Does the pipeline include more deliveries on par with the record set in this year’s second quarter?

Ian Anderson: Like most types of commercial real estate today, construction of medical offices has remained in check with demand. Not surprisingly, the vacancy rate of US medical offices hasn’t budged by more than 20 basis points in the last two years. In the second half of 2018, we saw construction volume of medical offices drop significantly, which should help boost rent growth for investors in the near-term. Then construction activity picked up in 2019 to levels consistent with the average since 2010, but still well-below the peak of construction in 2016.

 

Source: GlobeSt

Medical Office Building Investors Will Be Chasing Deals In 2020

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As we prepare to swing into the new year, the outlook for the medical office sector is good…largely.

Underpinning the market, as it always has, is the continual aging of the population and the increased medical services that come along with it.

But, despite this sure-bet demand, the sector is not without its challenges, as Al Pontius, SVP and national director of Marcus & Millichap’s Office and Industrial divisions, makes clear. Those concerns arise as a result of the massive industry trend toward consolidation and the move on the part of many formerly independent care providers to saddle up with national care brands.

The firm’s second-half Medical Office Buildings Report defines the growth of the merger movement:

“Hospital and health-system merger activity continues to transform the medical office sector, driving a reduction in physician-owned practices in recent years. In 2012, nearly half of locations were physician-owned practices, but in 2018, just 31 percent were owned by doctors.”

And therein lie the concerns for the existing stock of medical office buildings (MOB).

“There’s a lot of older-vintage product that’s not located where the health systems want to be,” says Pontius. “Some assets may not accommodate the desired configuration of services that the major health systems see as appropriate, modern enough or technologically supportive enough. Consequently, there are a number of buildings that will under-perform relative to newer properties in the sector as well as other asset classes.”

But while there might be assets that sit on the sidelines as healthcare needs grow, few investors, be they institutional or private, are doing the same.

“The consolidation has supported investor sentiment as major providers create efficiencies and broaden service coverage,” says the report. “A sizable pipeline of new space and major expansions by high-credit tenants will sustain elevated investment activity through the end of this year.”

 

Source: GlobeSt.

Wellington Regional Medical Center Acquires Additional 35 Acres For Future Medical Campus

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Wellington Regional Medical Center has acquired 35 additional acres in Westlake from Minto Communities for the future development of a medical campus. The transaction closed November 25. Terms were not disclosed.

The land is adjacent to a five-acre parcel on which the hospital built a freestanding emergency medical facility that opened to patients in April 2019. The ER at Westlake, located at 16750 Persimmon Boulevard, provides emergency medical care 24-hours a day, seven days a week with eight exam rooms, three rapid medical exam bays, one triage room, on-site lab services and on-site radiological services.

Wellington Regional’s parent company, Universal Health Services (UHS), had an option to acquire the 35 acres when it closed on the land for the emergency room facility early in 2018.

“Due to the early success of the ER at Westlake, we decided to exercise our option and move forward with purchasing the additional land,” said Pam Tahan, CEO, Wellington Regional Medical Center. “The City of Westlake is growing faster than expected and we want to be prepared to meet Westlake’s and the surrounding community’s health care needs as more people move into the area.”

Wellington Regional said it’s too early to determine how the land will be developed, but city zoning rules allow for medical-related uses such as a pharmacy, diagnostic testing, urgent care facility and an acute care hospital.

“We commend Wellington Regional for having the vision to start planning now to meet the future demand for medical services in this part of Palm Beach County,” said John Carter, vice president of Minto Communities USA. “At the rate Westlake is growing, there will be a big need for robust and quality health care services in the area sooner rather than later.”

Minto has sold over 420 single-family homes since opening Westlake in October 2017, beating expectations. Recently, the master-developer/builder started selling Phase 2 of its second neighborhood, The Meadows, priced from the low $300s. Minto’s first neighborhood, The Hammocks, is near sell out. That sales velocity has propelled the City of Westlake to become the fastest growing city in Florida according to U.S. Census figures.

The 3,800-acre Westlake community is approved for 4,500 homes and more than 2-million square feet of commercial space.

In June 2019, Minto opened the first phase of its $15 million amenities center. The Westlake Adventure Park includes a resort-style lagoon pool with water slide, a kids’ interactive splash pad, and poolside concessions. An expansive recreational lawn features a covered concert pavilion and grassy area for events, along with shade pavilions, grills and picnic area, BMX pump park, playground and bocce ball courts. Phase 2 will include basketball courts and adult lap pool.

Commercial development in Westlake is also well under way. Most recently, the City approved a 91-acre private college preparatory school and sports academy with the first phase of construction set to begin in January of 2020. Adjacent to the school, Christ Fellowship Church has submitted plans to build a new 13-acre campus as it grows its ministry throughout Palm Beach County. FPL is finishing up construction on a new 400-acre solar energy center, while Palm Beach County will soon open a new fire station and district headquarters just off Seminole Pratt Whitney Road. A new 7-11 gas station and convenience store is set to start construction in 2020.

Westlake is located at 16610 Town Center Parkway North in the City of Westlake, on Seminole Pratt Whitney Road between Southern Blvd. and Northlake Blvd.