According to a new report, the capital-intensive nature of outpatient medical facilities, combined with elevated borrowing costs, is pushing rents up in markets across the country, particularly in midsize cities.
US Healthcare real estate continues to buck the work-from-home trend that has stifled growth in office properties in all major economies post-Covid-19.
This is due to a number of factors, including the one-on-one nature of medical care and long-term growth trends in the medical sector in the US, which ensure that rentals and capital values for MOBs stay relatively stable.
The medical office market has consistently seen annual rent increases since 2012. Favourable lease terms support minimal tenant turnover, creating steady rental cash flow, thus benefiting both vacancy and rent trends. According to a report from Colliers, despite the rise in average rentals in MOBs, vacancies have declined to 8%, contrasting with vacancies in the office sector in general, which stand at 15.1% and growing.
Rentals for traditional offices usually rise faster than those for MOBs in upturns but MOB rentals tend to be more resilient during downturns. Since 2000, growth in MOB rentals has averaged 1.8% a year compared with 1.4% average growth for traditional office space.
These advantages arise due to several underlying drivers of MOBs.
One is that since the Affordable Care Act was passed in 2010, the number of Americans with health insurance has risen steadily. These trends are expected to continue. In June last year, the Office of the Actuary Centres for Medicare & Medicaid Services forecast that from 2022 to 2031 average growth in national health expenditure at 5.4% would outpace average GDP growth at 4.6% in the same period, resulting in an increase in the health spending share of GDP to 19.6% in 2031 from 18.3% in 2021. By 2031, 90.5% of the US population will have medical insurance (in 2009 it was 85%).
Another driver is the ageing US population. The number of people aged 65 and older in the US has risen by about 3% a year over the past decade, and older people are generally more likely to use medical services such as routine check-ups, dental cleaning and visiting specialists – which are increasingly happening in medical offices rather than hospitals.
Healthcare real estate is different from most other types of office building in that healthcare tenants are readier to sign long-term leases because they build up a reputation with patients in their vicinity and often require significant set up costs especially in the case of imaging, laboratories, theatres, oncology and even dentistry. For investors in these buildings, long leases provide predictable cash flow, lower tenant turnover (and associated sign-on costs) and lower vacancy rates.
While demand for healthcare real estate is growing, supply is restricted as banks are pulling back lending in an environment of high interest rates and construction costs, which deters new developments. In this environment, opportunities also arise to buy distressed assets at attractive entry points that will deliver superior returns over the long term.
According to a survey of 37 institutional healthcare investors by US-based management consultants KaufmanHall, which was published end-September 2023, almost 90% of survey respondents reported that occupancy rates had improved or stayed the same over the preceding 12 months. 86% of respondents expected their MOB portfolios would perform similarly or better in 2024, and almost the same proportion expected annual rentals to rise by 3% or more for new or renewed MOB leases.
Although the majority of respondents said tenant improvement packages were having to become more aggressive to persuade new tenants to sign or existing tenants to renew, only 16% said they had had to offer inducements such as a rental-free period. KaufmanHall suggested demands for better sign-on deals probably reflected rising costs due to inflation rather than more fundamental shifts.
“In short, the survey results indicate a market with significant fundamental strength despite capital market challenges. Cap rates are up, meaning valuations are down, and transaction volumes are also down. Past experience suggests that this dynamic may offer a significant opportunity to buy high performing assets at attractive historic relative valuations,” KaufmanHall said.
Steep increases in inflation and interest rates over the past couple of years have demonstrated that property is not always a safe haven. Investors in over-geared properties, or those where lease agreements provide no protection against rising tenant costs, are feeling the strain. There are an increasing number of distressed sales in the general office market. This is an environment where investors should pick their sector very carefully. Well-maintained and well-tenanted healthcare buildings in good locations, managed by an experienced team, stand out in this market.
Source: BizNews
Medical office is beloved by commercial real estate investors, operators, and owners because tenants typically stay for years and have good revenue and credit, allowing rent increases over time.
The medical business never really slacks, and demand is constant. Just ask Amazon why it’s expanding efforts in broadening virtual and physical medical clinics.
According to Shawn Janus, national director of healthcare services in the U.S. at Colliers, there’s a new trend of medical coworking, like a cross between medical and flex office types.
“Medical coworking spaces are shared work environments designed specifically for healthcare professionals, including doctors, entrepreneurs, therapists, and researchers,” James wrote. “These spaces provide a flexible alternative to traditional clinical settings, enabling practitioners to rent office or clinical space on-demand, often equipped with state-of-the-art facilities and medical equipment.”
He mentions a number of companies — ShareMD Suites, Clinicube, and MedCoShare — that offer such space for medical practitioners. Optix, a software vendor for coworking spaces in general, mentions Lina and Wellshare,
The market factors that make the approach potentially attractive are the negatives that independent practitioners face. Starting a practice is expensive. So is expanding one into a new geographic area. There are the costs of equipment and buildout, nursing staff management, appointment and billing management, cleaning, maintenance, and the price of real estate in a desirable location with easy access to parking. If a coworking space is doing billing, it may already be credentialed with insurance companies, a process that could otherwise take months before being able to request payment.
Instead of one business having to underwrite the total cost, a medical coworking facility can amortize the expenses across multiple practitioners. Optix says that thet ype of practitioner who might find a medical coworking space useful includes family doctors and general practitioners, but also mental health therapists, acupuncturists, dieticians, and others. Clearly, the type of tenant a space looks to attract will affect the layout of the space and necessary equipment and facilities.
“Most medical coworking spaces have multiple rooms specifically designed to fit a wide variety of practitioner needs, including therapy rooms, medical rooms, and cosmetic rooms, all under one roof,” they write.
Practitioners get a number of benefits from the arrangement including affordable space, networking and referral opportunities, more time with patients and less with operations and independence and flexibility.
There is a considerable amount of expense and operational effort necessary in running a medical coworking space, so the decision to invest in the property type is a significant one.
Source: GlobeSt.
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