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What Is Making The MOB Segment So Healthy?

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Since 2012, annual revenues from the pharmaceutical industry have increased from nearly $200 billion to almost $300 billion in 2018. In the same period, single-tenant medical office transactions jumped from almost $1.5 billion in 2012 to $2.5 billion last year.

What is causing the significant increase in single-tenant medical office transactions along with the robust health-care market?

The simple answer is an aging population. There is no question that America is getting older. According to the United States Census Bureau, the number of Americans 65 years and older is expected to double over the next three decades. An aging population requires more drugs, more health-care professionals and  more space to deliver medical services. For investors in net lease properties, the medical office sector can provide a strong investment opportunity to ride this seemingly unstoppable trend.

First, the space is more accessible to a wider group of investors with an average transaction size of nearly $10 million in 2018 vs. over $20 million for the rest of the single-tenant office sector.

Secondly, medical office is commanding higher per-square-foot valuations than the net lease office sector overall, with buyers paying a 7 percent premium per square foot over non-medical assets. This reflects the robust demand and healthy market fundamentals, as investors can take comfort in owning a solidly performing medical office property that commands a strong valuation.

In an investor survey recently conducted by JLL, respondents’ interest in office assets leased to health-care-related tenants outpaced that of technology, business services, government and financial services. Investors who are targeting the health-care space in 2019 indicated they are allocating on average 20 percent of their capital towards medical office assets.

Additionally, apart from industrial assets, investors indicated that the health-care sector was the most likely to exhibit a decrease in cap rates in the remainder of the year. This, along with the other factors previously mentioned, has attracted a diversified and evenly distributed buyer population. Institutional and private investors as well as REITs have been putting money into this property type, which indicates the depth of investor interest across the spectrum of buyers. Broad investor interest and increased demand is expected to continue to put owners in a strong position to sell their investments at attractive valuations in the future.

Finally, the asset class on average commands lower cap rates than the rest of the single-tenant office space, due to the mission criticality of the real estate. Its cap rate is reflective of its dependable stream of income. On average, medical cap rates are 30 basis points lower than those in the office sector overall.

As net lease investors navigate the uncertainty of the retail sector, the medical office space appears poised to offer an alternative, with strong, dependable returns that are more difficult to disrupt with technology and the internet. As long-term trends in health care continue to point toward longer lifespans and increased care, medical office space will remain critical and demand will increase, providing opportunities for investors to capitalize on this unstoppable force: growing old.

 

Source: Commercial Property Executive

Medical Office Stays Strong In Major Healthcare Metros: 16% More Space Projected In Next Decade

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Driven by an aging US population, the amount of medical office space needed in the next decade is projected to be 16% more than today based on current trends, according to a report by CoStar.

That’s greater than the combined medical office space in New York, Los Angeles, Chicago and Dallas–Fort Worth, the nation’s four largest medical office markets.

This 22,654-square-foot medical office building is located at 9500 North Central Expressway.

Following this healthcare growth pattern, a 22,654-square-foot medical office building located at 9500 North Central Expressway currently houses DaVita Central Dallas Dialysis. Robert Lynn Investments recently purchased the asset and has a new long-term agreement with a national surgical company to anchor the building.

Robert Lynn Investments will develop the new space and expects it to be operational in the first quarter of 2020. The investment division of NAI Robert Lynn was opportunistic in purchasing the off-market value-add opportunity, which is consistent with its portfolio strategy.

NAI Robert Lynn brokers Nick Lee and Justin Utay sourced the building purchase and presented it to Robert Hoodis, Robert Lynn Investments managing partner. Lee and Utay also handled lease negotiations with the new tenant.

“This was a highly collaborative venture between Robert Lynn Investments and NAI Robert Lynn that enabled us to customize a solution to truly meet the client’s needs,” said Hoodis. “As an investment company, we benefit tremendously by accessing NAI Robert Lynn’s brokers’ submarket expertise. It’s a relationship that not only helps us source off-market deals, but often negotiate them to a better outcome for our clients and tenants. In this case, our team of Robert Lynn Investments and NAI Robert Lynn discovered a desirable new location that enables us to better serve our client with great benefits.”

The building spans 22,654 square feet, with the new tenant space to take up approximately 12,037 square feet. The remaining usable space, approximately 8,200 square feet, is occupied by DaVita.

The building includes covered parking for patients and is optimized for patient flow. The location is a short distance from Texas Health Presbyterian Hospital, numerous medical offices and major highways.

“The 9500 N. Central project fits perfectly within Robert Lynn Investment’s portfolio strategy, which includes medical office buildings, surgical hospitals and surgery centers throughout the country,” Hoodis tells GlobeSt.com. “While we have built our portfolio primarily through acquisition, we have seen a recent increase in development opportunities. We consider the 9500 N. Central property a hybrid opportunity as an acquisition that includes a significant development component. The scope of this project requires us to take shell space and develop it into a full surgery center. In addition to 9500, we are currently working on several development projects, including the expansion of an existing surgery center and a large ground-up medical office project.”

 

Source: GlobeSt.

The Top Markets for Medical Office Buildings

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The medical office building sector is considered one of the safest in commercial real estate investments due to, among other factors, a national trend to lower healthcare property operating costs.

“MOBs are a lot more efficient to run, cheaper to operate and are usually leased on a triple net basis which is attractive to investors,” Rodman Schley, senior managing director of BBG tells GlobeSt.com.

According to a recently released report by BBG, between 2005 to 2016 MOBs rose by approximately 50% to about 41,000 nationwide.

“Houston, Minneapolis/St. Paul, Boston, Atlanta and Chicago have the largest concentration of MOB construction projects. Nationally, the MOB market accounted for an estimated 22 million square feet in 2018,” Schley says.

The Dallas/Fort Worth area had the nation’s highest number of MOB construction completions from the third quarter of 2017 to the second quarter in 2018, according to the report.

“The region had nearly one million square feet of medical office space added during this period,” Schley tells GlobeSt.com.

Besides lower operating costs, the increased demand for medical office buildings can be attributed to growing investor interest, convenience and technology, the overall pursuit of a healthier lifestyle, changes in reimbursement and regulations and the aging population’s need for medical care.

The average asking rental price for MOBs rose to nearly $23 per square foot, a 1.4% increase year-to-year. This is due to an increasing demand for the limited supplies of high quality, newly constructed, medical office space and other outpatient facilities.

“The rate of construction and the renovation of MOBs will continue growing,” predicts Schley. “It’s definitely a strong MOB market. We have a lot of baby boomers and they have medical needs. We’ve also become much more health conscious as a society. We are certainly not at an over saturation point in the MOB sector.”

 

Source: GlobeSt.