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On-Campus Medical Office Pricing Now Exceeds Off-Campus Assets

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Limited availability of on-campus medical office assets has led to its pricing to uncustomarily exceed that of off-campus assets in Q1 2023 for the first time since Q1 2020, according to a report from Cushman & Wakefield.

Some are seeing the sector as a safe harbor during these challenging economic times.

Jason Anzalone, managing director of development, Cypress West Partners, tells GlobeSt.com that macroeconomic volatility has led investors to pursue safe harbor investment options.

“They have found them in on-campus medical office assets that provide immediate adjacency to acute care facilities, often have health system occupancy, and credit quality and assurances of long-tenured occupancy,” says Anzalone.

C&W’s report said that off-campus transactions have historically made up a good majority of transactions over on-campus facilities.

“With often limited land and many healthcare systems holding ownership of on-campus assets,” Cushman wrote.

Since 2020, off-campus transactions have held an average 5% premium over on-campus in terms of pricing. Occasionally, off-campus averages have fallen below that of on-campus – notably during Q1 2020 at the start of COVID-19 and now, in the preliminary values for Q1 2023, according to the report.

Average cap rates for on-campus assets have grown by 50 bps to an average of 5.5%, while off-campus has risen by 45 bps to an average of 6.5%.

“As with overall transaction volume, both on-campus and off-campus assets have dropped during the second half of 2022,” according to the report.

Volumes for both categories remained relatively strong compared to pre-pandemic historical levels during the middle two quarters last year.

On-campus transactions exceeded $800 million, while off-campus transactions were above $2.5 billion. In Q4, transactions in both categories were much more limited, with off-campus transactions falling by 50% while on-campus receded to only $696 million.

 

Source: GlobeSt.

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5 Of The 20 Largest Medical Office Deliveries Expected This Year Are In One City

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A new report indicates Houston’s medical office market absorbed almost 40K SF in Q1, and more growth is coming, with the city poised to be home to five of the 20 largest medical office projects set to deliver this year across the nation.

Overall medical office leasing increased 26.4% year-over-year, according to JLL’s Medical Office Building Insight report that was just released. Additions to the market include the Hope Health Clinic’s 70K SF flagship location in Sugar Land and Orion Medical Group’s 47K SF building in Clear Lake.

Another 606K SF is under construction, according to the JLL report. Q2 is set to bring the delivery of the largest medical office building project in the country this year, per 42Floors.

A 400K SF, $1.3B project is the O’Quinn Medical Tower at the McNair Campus of Baylor St. Luke’s Medical Center, Houston Innovation Map reported. The 12-story building will include an ambulatory surgical center with 12 operating rooms and 10 endoscopy suites, an 80-bay setup for infusion therapy, more than 70 exam rooms and more than 850 parking spaces, the article states.

Four other Houston projects made 42Floor’s national top 20 list. Two of them are Kelsey-Seybold projects slated to deliver in Q3: a 158K SF center on the North Grand Parkway and a 116K SF ambulatory surgical center in Clear Lake. The other two projects listed are the 159K SF Houston Methodist Sugar Land Hospital Medical Office Building 4 and the 107K SF 1715 Project in Friendswood.

Houston offers the highest concentration of medical office building projects of any metro on the 42Floors list. That designation comes as healthcare systems like Houston Methodist and Memorial Hermann continue to expand their operations to match population increases, leading to sustained growth in the medical office market, JLL’s report states.

Other trends seen in Q1 include the popularity of Class-A medical office space, reflecting the flight to quality seen across the entire office sector. The absorption for Class-A medical office totaled about 50K SF while Class-B’s was -10K SF, balancing out to the nearly 40K SF total absorption.

Sugar Land and Clear Lake continue to show themselves as strong suburban markets for the medical office building market development, totaling over 2M SF and 1.75M SF of inventory, respectively.

The Woodlands, which is looking to become a hub for the life sciences industry, has 2.52M SF of medical office building inventory, according to the JLL report.

“Houston’s medical industry is propping up its potential to draw life sciences business,” Matt Gardner, leader of CBRE’s Americas life sciences advisory group, told Bisnow. “For decades, the pieces have been there. I think the sense around the world in the industry is that it’s starting to come together now. And it’s starting to show up for more of the growth that we’ve been hoping for for a long time.”

 

Source: Bisnow