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Getting In The Heads Of Medical Office Building Tenants

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Overall, MOBs are performing well, and are set to continue to do so. As long as the broker knows what’s hot and what’s not, we found out, the space is rich with opportunity.

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2023 Hospital Merger & Acquisition Activity Up 27% vs. 2022

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Hospital and health system merger and acquisition activity increased 27% year over year to 75 announced transactions in 2023, according to a report published Jan. 2 by Cain Brothers, a division of Key Banc Capital Markets.

Five things to know:

1. The increase in M&A activity is attributed to cooling macroeconomic headwinds as strategic discussions between hospitals and health systems pick up steam. Key factors driving activity in the sector include:

  • Improving market relevance
  • Desire for revenue and geographic diversification and economies of scale and capabilities
  • Decreasing EBITDA margins due to cost inflation
  • Reimbursement increases below historical rates
  • Medicaid expansion and certificate-of-need changes in certain states
  • Increasing construction costs per new bed

2. While M&A activity has been relatively consistent in recent years, new trends are gathering momentum such as transformative partnerships that expand beyond traditional acute care settings, according to the report.

3. Behavioral health, outpatient surgery and post-acute joint ventures are among the partnerships that hospital and health systems are pursuing this year, according to a Jan. 4 VMG Health survey of hospital executives.

4. Cross-market M&A activity is also a notable trend. Health systems are expected to continue to identify mergers across state lines with like-minded systems as they aim to generate economies of scale as a tool to fight elevated expense pressures, according to Fitch Ratings.

5. Some transactions have been met with regulatory challenges as state and federal agencies apply more scrutiny to deals they deem potential anticompetitive. Walnut Creek, Calif.-based John Muir Health terminated plans to fully acquire San Ramon Regional Medical Center from majority owner Tenet Healthcare — headquartered in Dallas — after the Federal Trade Commission sued to block the deal in December. The FTC argued that the transaction would drive up healthcare costs in the area by eliminating head-to-head competition between John Muir and Tenet.

 

Source: Becker’s Hospital Review

Medical Office Building Sector Remains Stable, Attractive

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Having weathered recent headwinds, the medical office building sector is seeing a return to more stable property fundamentals, according to a new Medical Office National Report from Institutional Property Advisors.

There was a COVID-driven fall-off in medical visits in 2020, but this has “generally dissipated,” the report states, adding that “medical office vacancy has stayed between 8 and 10 percent and, in June 2023, the rate was just 50 basis points above the long-term average.”

Rising construction costs have helped to prevent overbuilding, with medical office space totaling only 10.7 percent of the overall office pipeline. IPA points to a very different factor limiting the product type: “… the sector’s main challenge is not supply, but rather a health-care labor shortage.” The pandemic has exacerbated an existing worker shortage that may hinder practices seeking to expand to meet future medical care demand.

High interest rates have affected both deal flow and pricing. Transaction velocity in the MOB sector fell by more than 30 percent over the 12 months that ended in June.

“The average sale price has begun to recalibrate accordingly,” IPA reported, “dropping 3 percent from the high reached in 2022 to $295 per square foot for the yearlong span ended in June.”

MOB regional performance

MOB regional performance. Table courtesy of IPA Research Services; Bureau of Labor Statistics; Federal Reserve; Centers for Medicare & Medicaid Services; Moody’s

On top of that, a paucity of transactions, especially those of $10 million or more, have hampered price discovery.

Geographic Diversity

A variety of regions across the country split up top marks for different performance metrics.

The Mid-Atlantic and the Southeast (driven by Florida) lead in terms of low average vacancies, and the former is tops for a falling overall vacancy, having dropped by 40 basis points year-over-year. The Mountain States too have seen a sizable fall in overall vacancy, by 30 basis points.

Asking rents are highest (at $32.74) in the Pacific region, and lowest in the Midwest ($17.50). Rental growth was far and away the highest in the Central Plains region, with 7.8 percent year-over-year. The Northeast (4.6 percent) and Southeast (4.5 percent) were essentially tied for a distant second place.

 

Source: Commercial Property Executive