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MOB’s Low Vacancies, Longer Leases Boost Investor Appeal

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Vacancies? What vacancies? As medical offices go, the idea of unleased space is practically a foreign concept.

Thanks to an aging population that requires more care and the need for medical office visits when a patient is ill or has a chronic disease, medical offices remain in demand. As a result, in the first quarter of 2023, the national medical office vacancy rate was only 9.2% — just under half the 17.5% vacancy rate for traditional offices.

“From 2019 through the first quarter of 2023, vacancy in medical office properties has only risen 50 basis points nationally,” Marcus & Millichap reported in June.

The future outlook also seems healthy as the number of senior citizens increases and the amount of new medical office space being built remains limited. As of June, less than 12 million SF – or 1% of current inventory — was slated for 2023 delivery.

The report acknowledges, however, that availability depends on location-specific factors, such as resident demographics, existing local stock and metro-level construction pipelines.

Vacancy rates are especially low in warm weather markets which are experiencing an influx of retirees escaping cold-weather climates like Chicago or New York. The report cites a 190 basis-point drop in medical vacancy in the Dallas-Fort Worth area from 2019 to March 2023 “coinciding with a 17% surge in the metro’s age 65-plus cohort.” There was a similar pattern in other areas where the senior population grew more than 15%, such as West Palm Beach, San Antonio and Phoenix. Each saw vacancy falling by more than 200 basis points in the same period.

The strength of the medical office market is being bolstered by the entry of large retail chains such as Walmart Health. Walgreens has expanded into primary, specialty and urgent care following its $8.9 billion acquisition of Summit Health, while Amazon snapped up One Medical’s virtual, in-office and lab services. Other retailers entering the market could also boost demand for medical office space.

Post-Covid, medical office space has maintained an average sale price of just under $300 per SF. However, the report notes, dealmaking has slowed since the Fed began to raise interest rates. Uncertainty in the banking sector, which supplied over 75% of medical office financing in 2022, could also tighten lending.

On the other hand, medical office leases are generally signed for longer periods, reducing erratic swings, and healthcare is often non-discretionary. These factors, as well as telehealth and fewer labor challenges “could boost investor confidence in the long-term growth potential of the sector,” the report states.

 

Source: GlobeSt.

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.