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Investors Target Medical Office In Defensive Play

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Demand for medical office space has mostly normalized, with investors pouring capital into the asset class in what some experts are calling a defensive strategy.

“While some people continue to practice caution amid the emergence of new COVID-19 variants, ultimately many of these appointments must be fulfilled,” Marcus & Millichap’s Alan Pontius writes in a new report. “All the while, the population is aging, which brings along certain medical realities. These factors together underpin the current strong tenant demand for medical offices.”

While traditional offices saw a major rise in vacancy at the onset of the pandemic, medical office vacancy rose just 80 basis points to 9.5% in 2020.  Availability tightened at the tail end of 2020, which drove the average asking rental rate up to $22 per square foot, an increase of nearly 4% from the end of 2019.  Asking rents were highest in San Francisco, followed by New York City, Los Angeles, San Jose, Miami-Dade, Oakland, San Diego, Orange County, Seattle-Tacoma, and Washington, D.C. Meanwhile, vacancy was lowest in 2021 in San Jose, Portland, Louisville, Seattle-Tacoma, and Salt Lake City.

Supply additions expected this year are on par with 2020 figures, with an estimated 9 million square feet of space projected to open this year. Marcus & Millichap predicts that vacancy will decrease to 9.2%, down 20 basis points and 40 basis points above pre-COVID levels.  Meanwhile, the firm predicts rent growth in the neighborhood of 2.5% to an average of $22.61 per square foot, with six markets predicted to hit levels above $30 per square foot led by the Bay Area, New York, Miami-Dad, and Los Angeles.

Staffing shortages remain a headwind for the sector in the short term, as the health crisis continues to hit healthcare worker payrolls. Stated simply, healthcare workers are burned out, and “medical practices are aware of this dilemma,” according to Marcus & Millichap, adding that 73% of those surveyed in a recent national poll ranked staffing as their largest pandemic-related challenge at the start of this year.

“The inability to onboard staff may keep medical practices from expanding this year, combating what are otherwise strong demand tailwinds,” Pontius says.

 

Source: GlobeSt.

Seniors Housing and Skilled Nursing Could Be Investor Favorites

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Skilled nursing sectors investor favorites, a new report from Marcus & Millichap predicts.

Third quarter data showed that seniors housing move-ins are rising as more residents become vaccinated, with occupancy rising in both segments from July through September. Rents are also up annually by more than 1% across all four levels of care, led by memory care and assisted living.

Skilled nursing’s recovery was a bit more muted, with occupancy at 76.2% in November, down 1,000 basis points over 2019 numbers. But nationally, the average daily rate has increased or held firm in every quarter for more than a decade.

“But the near-term future is opaque with the pandemic still creating uncertainty,” Marcus & Millichap’s Benjamin Kunde notes. “However, seniors housing and skilled nursing facilities remain a key piece of the care spectrum, and the current environment may present unique favorable circumstances for investors. Temporary hurdles coincide with longer-term tailwinds that are becoming more apparent.”

Development has eased as of late, with less than 48,000 seniors housing units breaking ground in October, a 30% decrease from the typical pace. But Kunde says “robust demand is on the horizon, potentially outpacing supply and powering occupancy improvement.” In particular, aging baby boomers are likely to push a demand surge in the future, and they have money to spend: some estimates say the segment holds more than half of all US wealth.

One potential headwind? Labor shortages, which continue to plague both segments. A study by the American Health Care Association and the National Center for Assisted Living shows that three-fourths of respondents believe the staffing situation for assisted living has gotten worse from midyear through September.

“Many operators are utilizing higher compensation to attract staff, which is costly at a time when insurance fees have increased and infrastructure improvements are needed for virus containment,” Kunde notes. “Furthermore, some operators are allocating funds to ramp up marketing efforts, as many facilities are trying to fill rooms at the same time. Endeavors to entice prospective residents are especially important in the near term, as move-ins should accelerate once a broader return to workplaces reduces the number of people able to provide at-home care.”

Meanwhile, investors who pressed pause during the pandemic have a stash of capital and are reentering the market. Sales volume has matched the 2020 total already, and Kunde predicts that momentum will continue as owners list properties following the end of government stimulus funds which helped keep the industry afloat.

“The cost of capital remains low, and potential interest rate hikes and tax changes on the horizon could drive sales activity in the near term,” Kunde says. “Still, many investors are taking a cautionary approach as various short-term headwinds are lingering. Uncertainty in the marketplace and ongoing price discovery adds a wrinkle to getting deals done.”

 

Source: GlobeSt.

Report: MOB Sector Boosted By Demand And Capital

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The medical office sector was firing on all cylinders before the arrival of COVID-19, and it appears to be well-positioned for a robust rebound post-pandemic, according to a special report by Marcus & Millichap.

In the third quarter forecast titled Beyond the Health Crisis: National Medical Office Outlook, the company notes that the adaptation of patient care and the ongoing rise in health-care needs will buoy demand for medical office buildings despite the disruption brought on by the coronavirus.

“The medical office sector is being tested as operators navigate new challenges created by COVID-19. Medical office was once perceived to be a more resil­ient asset class during a downturn, but the unique uphill battle faced by health-care providers due to the pandemic has choked revenue streams and considerably shrunk margins,” according to the Marcus & Millichap report.

The national vacancy rate rose to 8.9 percent, marking an increase of 40 basis points from the second quarter of 2019. Project abandonment and delays caused construction activity to drop 1 million square feet year-over-year. Additional projects will be postponed or canceled in the upcoming months; however, this will help stave off any threats of overdevelopment in the sector.

Other fundamentals, such as rental rate trends, serve as indicators of strong performance ahead. Most REITs reported a solid level of rent collections even though many tenants pursued deferrals and rent relief. Additionally, rent growth continued its pre-pandemic upswing, climbing to an average of $25.22 per square foot.

A New Age In Health Care

Well in advance of the appearance of the coronavirus, the U.S. health-care industry had begun to decentralize, providing more medical care in outpatient facilities instead of hospitals.

“Excluding some major surgeries, off-campus properties now offer the highest quality of care and complex procedures, driven by the need to provide equal levels of service across a metro,” according to the Marcus & Millichap report. “New hospital and expansion projects continue to target suburban areas as a demographic shift has caught the attention of health systems, placing more modern facilities and specialized care closer to patients’ homes. As these medical districts expand, the need for nearby outpatient clinics and supportive services generates demand for medical office space.”

Telehealth, via phone or online video, increased dramatically as a result of social distancing, and while experts expect the use of virtual care options to continue to rise in the post-pandemic environment, they do not expect it to result in a reduction in the need for medical office buildings. According to the report, the need for certain in-person visits will remain, as will the need for labs and imaging, all of which will translate into continued demand for medical office accommodations.

Finally, the coronavirus has not changed the fact that the considerable Baby Boomer population continues to age, and it’s doing so in an era when medical technology and advancements are supporting longer lifespans. As Marcus & Millichap notes in the report, the population of citizens aged 65 and older will expand by 30 percent over the next 10 years.

And with age comes more visits to the physician’s office. Individuals in the 55-64 age range make an average of 4 physician visits annually, but the number of yearly visits rises to 5.9 for those in the 65-74 age range and jumps to 7.6 for those 75 and older.

“Despite the short-term costs, the health-care industry will be one of the quickest to bounce back from the pandemic since the care needs of a growing and aging population continue to increase,” Marcus & Millichap asserts in the report. “Medical services are returning as states move through reopening phases, and pent-up demand from postponed procedures and office visits provide a positive outlook.”

Read the full report on Marcus & Millichap’s website.

 

Source: Commercial Property Executive