Report: MOB Sector Boosted By Demand And Capital

/in , , /by

The medical office sector was firing on all cylinders before the arrival of COVID-19, and it appears to be well-positioned for a robust rebound post-pandemic, according to a special report by Marcus & Millichap.

In the third quarter forecast titled Beyond the Health Crisis: National Medical Office Outlook, the company notes that the adaptation of patient care and the ongoing rise in health-care needs will buoy demand for medical office buildings despite the disruption brought on by the coronavirus.

“The medical office sector is being tested as operators navigate new challenges created by COVID-19. Medical office was once perceived to be a more resil­ient asset class during a downturn, but the unique uphill battle faced by health-care providers due to the pandemic has choked revenue streams and considerably shrunk margins,” according to the Marcus & Millichap report.

The national vacancy rate rose to 8.9 percent, marking an increase of 40 basis points from the second quarter of 2019. Project abandonment and delays caused construction activity to drop 1 million square feet year-over-year. Additional projects will be postponed or canceled in the upcoming months; however, this will help stave off any threats of overdevelopment in the sector.

Other fundamentals, such as rental rate trends, serve as indicators of strong performance ahead. Most REITs reported a solid level of rent collections even though many tenants pursued deferrals and rent relief. Additionally, rent growth continued its pre-pandemic upswing, climbing to an average of $25.22 per square foot.

A New Age In Health Care

Well in advance of the appearance of the coronavirus, the U.S. health-care industry had begun to decentralize, providing more medical care in outpatient facilities instead of hospitals.

“Excluding some major surgeries, off-campus properties now offer the highest quality of care and complex procedures, driven by the need to provide equal levels of service across a metro,” according to the Marcus & Millichap report. “New hospital and expansion projects continue to target suburban areas as a demographic shift has caught the attention of health systems, placing more modern facilities and specialized care closer to patients’ homes. As these medical districts expand, the need for nearby outpatient clinics and supportive services generates demand for medical office space.”

Telehealth, via phone or online video, increased dramatically as a result of social distancing, and while experts expect the use of virtual care options to continue to rise in the post-pandemic environment, they do not expect it to result in a reduction in the need for medical office buildings. According to the report, the need for certain in-person visits will remain, as will the need for labs and imaging, all of which will translate into continued demand for medical office accommodations.

Finally, the coronavirus has not changed the fact that the considerable Baby Boomer population continues to age, and it’s doing so in an era when medical technology and advancements are supporting longer lifespans. As Marcus & Millichap notes in the report, the population of citizens aged 65 and older will expand by 30 percent over the next 10 years.

And with age comes more visits to the physician’s office. Individuals in the 55-64 age range make an average of 4 physician visits annually, but the number of yearly visits rises to 5.9 for those in the 65-74 age range and jumps to 7.6 for those 75 and older.

“Despite the short-term costs, the health-care industry will be one of the quickest to bounce back from the pandemic since the care needs of a growing and aging population continue to increase,” Marcus & Millichap asserts in the report. “Medical services are returning as states move through reopening phases, and pent-up demand from postponed procedures and office visits provide a positive outlook.”

Read the full report on Marcus & Millichap’s website.

 

Source: Commercial Property Executive

Developer Pursues Plans To Build New VA Outpatient Center In Daytona Beach

/in , /by

An Ohio developer hopes to break ground early next year on a new Veterans Affairs Outpatient Center here.

The proposed 131,000-square-foot center would replace two smaller nearby VA facilities when it opens in either late 2022 or early 2023.

A rendering of what the new VA Center would look like. (CREDIT: News-Journal/Clayton Park)

Developer Rustom Khouri III said his company is still waiting to find out if it will be awarded the federal government contract to build the project. That decision is expected in the next 30 to 45 days.

“We’re very optimistic,” said the director of business development for Carnegie Management & Development Corp. “We’re already going through the zoning approval process with the City.”

Khouri and officials from Harris Civil Engineers in Orlando just presented plans for the project. The developer-initiated neighborhood meeting was held via a Zoom videoconference call.

Carnegie put the 78-acre site under contract late last year to purchase from Volusia County Schools for $4.5 million. The mostly wooded site is on the west side of Williamson Boulevard, directly south of Daytona State College’s Advanced Technology College.

The developer is based in the Cleveland, Ohio, area. To date, Carnegie has developed a dozen facilities for the U.S. Department of Veterans Affairs in multiple states. This would be its first in Florida.

“We want this to be a best-in-class healthcare facility for veterans in the Daytona Beach area,” Khouri said.

Khouri declined to estimate how much the project would cost to build. He said that would depend on the amount of the federal government contract when or if it is awarded.

Al Bogna, vice president of real estate for Carnegie, told Volusia County School Board members in November of last year that the project could cost between $60 million and $70 million to build.The project is expected to create 300 construction jobs. Carnegie submitted its proposal to the federal government after the General Services Administration in early November issued a request for bids from developers.

The U.S. Department of Veterans Affairs wants a larger outpatient center that could serve as a one-stop location for veterans in the Daytona Beach area. The GSA request for bids specifies that the new VA outpatient center would need to be within the area between West Granada Boulevard to the north, Dunlawton Avenue to the south, Tymber Creek Road to the west and Ridgewood Avenue to the east. Khouri said he is unaware of bids from any other developers for the VA project in Daytona Beach.

The two older VA facilities the project would replace are the William V. Chappell Veterans Multi-Specialty Outpatient Clinic off Dunn Avenue and the Westside Pavilion Uniform Mental Health Services Annex at 1620 Mason Ave. The two clinics have a combined total of roughly 74,000 square feet of space.

“The current space in these facilities is insufficient to meet the projected needs of the veteran community,” the GSA’s request for lease proposals stated. “The new facility … will provide a single location in the Daytona Beach area to serve the outpatient needs of veterans and their families.”

The proposed new VA outpatient center would provide primary care, mental health, and specialty medical care services. It would include a medical lab, a pharmacy, physical rehabilitation facilities, and eye and dental clinics.

“It would also offer prosthetic and sensory aid devices and radiology and speech pathology services,” said Khouri. “The center would include an on-site canteen. Some veterans in the Daytona Beach area drive more than an hour to Orlando for VA services.”

Volusia County is currently home to more than 50,000 military veterans, according to the most recent Census Bureau estimates.

“A new VA outpatient center is certainly much needed in this area,” said Khouri. “It’s a high-growth market, both in veterans and overall population. When we came down to this market almost two years ago, we came into contact with several veterans who voiced a need for something like this.”

The campus for the proposed VA outpatient center would include more than 50 acres set aside for “future growth.” The 24 acres where the center would be built would include a “flag pole plaza” near the entrance, surface parking for 750 cars, as well as gardens, trails and a large storm water retention pond.

“We’re trying to create a campus feel,” said Khouri. “The North Williamson Boulevard corridor is really beautiful. We want to maintain a lush tree line along Williamson as well as being environmentally sensitive.”

“Plans call for adding trees to the campus as well,” said Abdul Alkadry, a project manager with Harris Civil Engineers.

The new VA outpatient center is expected to generate approximately 1,400 daily car trips to and from the facility. Plans call for the construction of two new entrances off of Williamson. The stretch of North Williamson Boulevard where the VA outpatient center would be built is currently being widened from two to four lanes. The proposed project is just north of the LPGA Boulevard corridor that has become a hotbed for new home construction and commercial development activity in recent years.

Khouri said he believes the widening of Williamson should be more than enough to accommodate the extra traffic the VA outpatient center would generate.

“We’re very hopeful and confident we can deliver a product that will be able to serve veterans and be a positive addition to the community,” Khouri said.

 

Source: The Daytona Beach News-Journal

Medical Office Building Sales Fell Nearly 50 Percent In Q2, But The Sector’s Outlook Is Strong

/in , , /by

The volume of MOB investment sales transactions in the second quarter of 2020 totaled around $2.2 billion, a 43 percent decrease compared to a year ago. In the first quarter of 2020, MOB investment sales volume reached $3.7 billion, according to data firm Real Capital Analytics (RCA).

The CoStar Group, another provider of commercial real estate data, pegs MOB investment sales volume at around $2.1 billion in the second quarter, a drop of 54 percent from $4.7 billion from a year ago.

“The volume of sales has absolutely hit pause, it hit the brakes really hard in the second quarter. You saw a significant drop in sales volume,” says Keith Pierce, research manager for Southeastern region with real estate services firm Transwestern. “The price per square foot did not really shift that much for those sales that did close. But by and large, just everybody froze in late March and largely stayed frozen until sometime in June.”

Average cap rates on transactions involving MOB assets remained at 6.6 percent at the end of the second quarter, flat with the figure from a year ago and the first quarter of 2020, according to RCA. CoStar pegs average MOB cap rates at 6.7 percent, also registering no change from the previous quarter.

“I anticipate seeing somewhat of a flattening,” says Russell Brenner, president of the medical office and life sciences division with real estate investment firm CA. “Once the market truly opens up again and lenders, which have been very selective in where they lend, come back into the market in droves and in a more significant way, I think you may well see cap rates continue to fall. But for probably the next two three quarters, I think it will be a largely flattening of cap rates.”

Earlier during the pandemic, many Americans largely postponed elective procedures, which put a dent on revenues for medical office tenants. But in states where those facilities are reopening, industry sources are reporting pent-up demand.

“We saw very few delinquencies, perhaps a handful of rent deferral requests, but by and large, the healthcare medical office tenancy as a whole stood up very well,” says Brenner. “Certainly now that elective procedures are back on in most parts of the country, MOBs are poised to bounce back and will continue to be a stable and reliable asset class.”

“Medical practices are running at 90 to 95 percent of pre-pandemic levels,” says Steve Hall, senior managing director for healthcare advisory services at Transwestern, who expects this level of demand to continue through the end of the year.

“Many of the company’s tenants are back to 80 percent of pre-pandemic levels of procedures and services,” says Jon Boley, senior vice president of acquisitions and development for HSA PrimeCare, a firm that develops, leases and manages medical facilities.

“The reason these businesses are not back to 100 percent is because they are having to do above-standard cleaning in order to disinfect surgery centers throughout the day,” Hall notes. “A factor that will shore up MOB assets in the future is the dearth of new construction happening right now. During a pandemic, a lot of people aren’t pulling the trigger on a brand new construction. The lack of construction going on right now I think is really going to keep the market strong since there is not going to be oversupply.”

 

Source: HREI