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Medical Offices Ready For Spike In Record High Number Of Insured

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The total number of uninsured in the US has reached a new low and the medical office asset class stands to benefit from it, according to Marcus & Millichap’s 2024 National Investment Office Forecast.

This robust demographic will need and seek more visits to healthcare providers, subsequently driving tenant demand for medical spaces, particularly in markets such as Louisville, Seattle-Tacoma, Portland, and Boston.

Those areas have sub-6.5 percent vacancy rates. Texas has the largest percentage of uninsured residents nationwide and carries an office vacancy rate above 15 percent in San Antonio, Houston, and Dallas-Fort Worth.

Arizona and Nevada, too, have high uninsured populations, with vacancies in Tucson, Phoenix, and Las Vegas above 12 percent.

In Florida, some metros notably refute this trend as the state’s uninsured rate is over 11 percent, but West Palm Beach and Miami-Dade have some of the lowest vacancies among major U.S. markets. Medical office projects are slated to constitute approximately 70 percent of the space completed in Tampa this year.

In 2023, fewer medical office assets changed hands than in 2022. However, transaction activity is above the 10-year average in most regions. An aging population will necessitate medical office expansions long-term.

Marcus & Millichap cited a challenged borrowing environment and said this pressure will likely ease in 2024 as many investors expect interest rate cuts.

“Additionally, private investors have become more active in the space as institutions pull back,” according to the report. “Deals in lower price tranches have increased the use of seller financing in some cases, circumventing lender-based headwinds.”

The report said that the new supply would fall to a nearly two-decade-low construction as it will be reduced by 8.5 million square feet to approximately 500,000 fewer square feet of medical office space this year compared to last. This will push total inventory up by just 0.7 percent.

“Limited additions will prevent any major supply headwinds going into 2024 and beyond as new starts decrease as well,” according to Marcus & Millichap.

Vacancy rates will climb by 20 bps to about 9.8%, according to the report. Meanwhile, medical office tenants will still grapple with a prevailing labor shortage, complicating operator expansion plans.

The average asking rent for medical office space will rise by 1.3% to $23.40 per square foot by December as new buildings come online, reaching a more than two-decade high. Metros such as West Palm Beach, Salt Lake City, and Portland are expected to lead the nation in rent growth, concurrent with local vacancy rates below the national average, according to the report.

 

Source: GlobeSt.

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Demand Calling For Taller Medical Office Buildings

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Look up. medical office building developers are sizing their assets much taller.

Given the growing number of seniors requiring health care and the accelerated population growth of some metros, providers are requiring larger, specialized facilities to expand their capabilities in key areas, according to a report by 42Floors.com.

Houston is leading the way with 2023’s largest medical office building delivery at 400,000 square feet across 12 floors: The O’Quinn Medical Tower. It is home to four other medical properties among the 20 largest nationwide — the highest concentration of any metro nationally.

Columbus, Ohio, and St. Louis are developing the second and third-largest buildings. Six properties in the top 20 are in Texas, followed by two each in New Jersey, Florida, and Kentucky.

Land Cost Drives Incentive to Go Big

“Due to the cost of land being so high, there’s an incentive to build larger office buildings,” Peter Hays, Practice Real Estate Group’s senior vice president and Houston agent, tells GlobeSt.com. “Buying a smaller piece of land and constructing a small building can be too expensive in comparison. Given the rapid growth rate of Houston, the land is quickly disappearing. Businesses and medical groups know what’s happening and are acquiring what’s left in anticipation of being able to eventually develop or sell it for a profit in the future. This is going to make it increasingly difficult for individual buyers to invest in land.”

Adding to the buzz about medical office space is that since the pandemic, it has gained the reputation of being one of the more resilient commercial asset types. Accordingly, multi-tenant medical buildings are increasingly popular with investors looking to diversify their portfolios amid uncertainty, according to the report.

What many entries in 42Floors’ top 20 had in common was the fact that they were all owner-occupied expansions of campuses belonging to larger healthcare operators.

While Texas led the overall list by state, New Jersey was next, based on total square footage. It is home to the fourth- and fifth-largest developments this year: The first is the construction of a new ambulatory medical pavilion that will be part of the Robert Wood Johnson University Hospital in New Brunswick at 210 Somerset St.

Second is Reconstructive Orthopedics, a conversion of an office building into a medical facility situated within New Jersey’s state borders but actually part of the Philadelphia metro area.

 

Source: GlobeSt.

Medical Office Building Construction Remains Strong In Starts And Completions

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Although many healthcare real estate (HRE) professionals correctly predicted that medical office building (MOB) sales would remain strong during the COVID-19 pandemic, they did express some concern that construction numbers would fall as providers would be forced to focus on myriad other concerns than moving into new buildings.

But that hasn’t been the case so far.

“Medical office construction has remained very strong throughout COVID, both in terms of starts and completions,” said Hilda Flower Martin, a principal with the HRE research and data firm, during a Jan. 26 Revista webcast. “Completions slowed a little bit towards the end of the year (2020), but starts remain pretty much in line (with past years), as there was about 20.9 million square feet of MOB space started as of the fourth quarter (Q4) of 2020 on a trailing 12-month basis (TTM). The MOB projects being built are typically well pre-leased and continue to get larger.”

 

Source: HREI