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New Medical Office Building Rents Substantially Higher Than Pre-Pandemic Era

Rents for medical office buildings are getting a closer look in this challenging economic period for commercial real estate as the sector’s defensive qualities can be a comfort for investors.

Medical office features long-term leases, reliable net operating income with predictable but modest rental increases, and steady average national occupancy at 92% through all cycles, according to JLL’s latest Healthcare Perspectives report.

These are an offset to higher rent growth from in-favor, high-growth sectors such as industrial and multifamily, with more cyclical characteristics.

“The current inflationary environment has presented headwinds on a relative basis for medical offices,” JLL said. “However, owners and purchasers of medical properties with leases signed prior to last year will likely benefit in the future from upward fair market rent adjustments from tenants that renew in place or new tenants that move in.”

Recently Constructed MOBs Performing Well

Rents for recently constructed and to-be-delivered MOBs are up substantially from the pre-pandemic era, JLL said.

Rent for a build-to-suit project commissioned today that is $11.53 per square foot higher or 53% more than a similar MOB built immediately prior to the pandemic increased from $21.91 per square foot in 2020 to $33.43 per square foot in 2023, JLL figured.

Meanwhile, property sectors such as industrial and multifamily have offered higher asking rent growth in the last three years, averaging 13.1% and 7.9%, respectively, compared to MOB which averaged just 5.2% growth during the same period.

JLL said the average medical office rent growth of 2% annually historically has been challenged in the current inflationary environment with CPI increasing 5% year-over-year through March 2023. That CPI read was the lowest monthly increase since fall 2021.

Investors can also take to heart that rents on renewals of in-place leases are frequently shown to be at 4% or more.

“Contractual annual rent escalations of 3% are becoming more universally accepted versus the historical 2% average,” according to the JLL report.


Source: GlobeSt.