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Medical Office Buildings Poised For Quick Recovery

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While hospitals and health-care facilities have been inundated by an influx of COVID-19 patients, many medical offices that offer non-emergency services have seen the opposite occur.

The property type’s solid fundamentals prior to the virus, however, promise a relatively rapid rebound when the economy is up and running again, according to Marcus & Millichap’s April special report on medical office buildings.

With many shelter-in-place orders in effect, communities across the U.S. are avoiding unnecessary travel and exposure, including those patients seeking elective surgeries or nonessential surgical and dental procedures. As patients decide to reschedule their appointments until further notice, many medical offices aren’t generating revenue and have had to partially, or fully, close.

The Post COVID-19 MOB Market

The COVID-19 pandemic has already left its mark on different facets of commercial real estate like office leasing, construction and retail. While the medical office building market was not spared, its strong market fundamentals prior to the emergence of the new coronavirus offer signs of a healthy market after the pandemic ends.

The national vacancy rate for medical office buildings was 90 basis points below the trailing 10-year-average of 9.7 percent, according to the report. The U.S. market also saw 6 million square feet of medical office space absorbed in 2019. Following demand, the below-average availability of medical offices has led to a steady stream of new properties, with deliveries hitting 10 million square feet. The statistics have attracted the attention of private investors looking for assets between $1 million and $10 million.

Once the COVID-19 pandemic is under control and the economy recovers, the medical office building market is expected to bounce back. The combination of an aging population, expanded medical insurance coverage and new treatment options equate to a growing demand for health care and the medical offices that come with it. Once the economy begins to return to normal, the backlog of work due to closed offices and rescheduled or canceled appointments will likely bring a sudden influx of work for medical-office staff.

And once the market returns to normalcy, the report noted that well-located assets with the infrastructure to handle modern medical needs will be in high demand. Specifically, medical office building demand may grow in non-urban markets as younger Millennials begin to move away from urban centers.

 

Source: Commercial Property Executive

Medical Office Building Investors Will Be Chasing Deals In 2020

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As we prepare to swing into the new year, the outlook for the medical office sector is good…largely.

Underpinning the market, as it always has, is the continual aging of the population and the increased medical services that come along with it.

But, despite this sure-bet demand, the sector is not without its challenges, as Al Pontius, SVP and national director of Marcus & Millichap’s Office and Industrial divisions, makes clear. Those concerns arise as a result of the massive industry trend toward consolidation and the move on the part of many formerly independent care providers to saddle up with national care brands.

The firm’s second-half Medical Office Buildings Report defines the growth of the merger movement:

“Hospital and health-system merger activity continues to transform the medical office sector, driving a reduction in physician-owned practices in recent years. In 2012, nearly half of locations were physician-owned practices, but in 2018, just 31 percent were owned by doctors.”

And therein lie the concerns for the existing stock of medical office buildings (MOB).

“There’s a lot of older-vintage product that’s not located where the health systems want to be,” says Pontius. “Some assets may not accommodate the desired configuration of services that the major health systems see as appropriate, modern enough or technologically supportive enough. Consequently, there are a number of buildings that will under-perform relative to newer properties in the sector as well as other asset classes.”

But while there might be assets that sit on the sidelines as healthcare needs grow, few investors, be they institutional or private, are doing the same.

“The consolidation has supported investor sentiment as major providers create efficiencies and broaden service coverage,” says the report. “A sizable pipeline of new space and major expansions by high-credit tenants will sustain elevated investment activity through the end of this year.”

 

Source: GlobeSt.