As the population ages and the youngest of the Baby Boomers enter their 60s, the need for in-person health care is increasingly critical. But some markets in the U.S. are experiencing more demand than others, and as a result, some MOB spaces are commanding top dollar.
Despite all the doom and gloom of the news about the office sector, one component remains strong: medical office buildings.
It is buoyed by a stable clientele, long-term leases, and a slow pace of new entries. Even better, the buildings’ tenants can rely on a steady flow of customers in need of care. The flow has even increased as a result of passage of the Affordable Care Act, an aging population, and advances in medical technology that enable more procedures to be delivered in lower-cost, more efficient outpatient settings.
And investors are paying attention, according to the just-released 2024 report “Emerging Trends in Real Estate” issued by PWC and the Urban Land Institute. In total, the U.S. healthcare industry represents 17% of GDP. Outpatient care and care provided in medical office buildings is a significant share of the total.
“The sector has also been shifting to a retail mind-set, where hospital systems and providers look to attract new patients and build market share in new areas, contributing to the increased demand for high-quality medical space,” the report noted.
For landlords, medical offices are practically ideal tenants. They may sign leases of 15-20 years and are likely to renew them in order to remain close to their patient base.
“Typically, the renewal rate is 80% or more and rent growth generally ranges between two and three percent a year,” the report stated. “These dynamics have helped the medical office sector maintain healthy fundamentals throughout economic cycles.”
Furthermore, occupancy has risen in recent years as space absorption has outpaced square footage added. The occupancy rate was 92.8% in 2Q 2023.
Nevertheless, “after reaching peak investment volumes of $30.2 billion (annual basis) in the third quarter of 2022, medical office transaction volume has since slowed to $20.2 billion as of the second quarter of 2023,” the report noted.
But while it has slowed, it has not stopped. Transaction volume totaled $4.7 billion in the first half of 2023 – lower than the $10.1 billion sold in the same period of 2022, but consistent with levels seen from 2018 through 2021. Few distressed sales have occurred. The report attributed the lower transaction volumes to a “disconnect” between sellers and buyers.
“But the stage is set for increases in volumes when buyers and sellers can better come together and the capital markets begin to normalize,” it said. “The medical sector is large and investable, comprising over 1.5 billion SF of current inventory. A substantial amount of opportunity exists for investors to take on more ownership.”
By square footage, over half the sector is owned by users – hospitals, providers, and physician groups. The rest is owned by REITs and private investors who use a variety of structures and vehicles to make it work, the report noted. Institutional investors often invest through operating partners, frequently vertically integrated regional or national firms that specialize in the development, acquisition and operation of medical office buildings and often have deep relationships with hospitals, health systems and physician groups.
Speculative development is rare, leaving inventory to increase at a pace driven by tenant demand, currently around 1% and seldom rising more than 2% a year.
The opinion of experts surveyed for the report is largely favorable. Some 48% recommended buying, 46.4% said hold, and just 5.8% said sell. And while 34.3% considered the sector overpriced, that was a much smaller percentage than viewed suburban and central-city offices as overpriced. Some 61.4% thought medical offices were fairly priced and 4.3% thought they were underpriced.
“The medical office sector has matured into an attractive and stable CRE asset class of its own,” the report concluded.
Source: GlobeSt
Battered by the lingering pandemic, a rise in inflation, supply chain slowdowns and recessionary fears becoming reality, the healthcare industry has faced crisis after crisis over the past several years.
But it could be commercial real estate to the rescue, at least partially, to help solve one of the industry’s most longstanding, yet persistent problems: healthcare’s chronic staffing issues.
Healthcare experts at Bisnow’s Chicago Healthcare & Life Sciences Real Estate event Aug. 11 at Illinois Science + Technology Park said that though challenges to the industry are overt, real estate is poised to be a partner in helping healthcare reconsider how it uses space for patient care in the current market, especially in light of staffing shortages exacerbated by years of a punishing pandemic.
“A lot of what we see in healthcare real estate decisions is using the real estate in a way to leverage staffing issues,” Ryan Cos. Vice President of Development-Healthcare Curt Pascoe said. “CRE can help fill gaps by optimizing space, either consolidating locations or reconstructing locations in a way that allows you to eliminate a front desk person or eliminate a nursing position.”
Even before the pandemic, the nation suffered from a lack of skilled nurses and other healthcare workers. Then some 1.5 million healthcare jobs were lost in the first two months of the pandemic alone as clinics closed and U.S. hospitals restricted services. Most jobs have since returned, though healthcare employment remains 1.1% below pre-pandemic levels, according to Colliers’ 2022 Mid-Year Healthcare Outlook — many of them lost permanently to burnout.
Shawn Janus, national director of U.S. Healthcare Services at Colliers, said that while he has seen persistent staffing shortages throughout his past 20 years in the industry, he is most concerned about the looming physician shortage, which the Association of American Medical Colleges predicts will cause the U.S. to need 37,800-124,000 more doctors in the next 12 years.
As healthcare facilities look to scale back and cut costs in the face of rising inflation, panelists said, they’re also making reductions in administrative spending to account for pandemic staff losses and increasing demands by millennials for flexible work options.
That’s where real estate can step in, helping healthcare consolidate or reconfigure space to minimize staffing holes.
“A lot of those hospitals have that administrative space in the hospital, which is already certified for joint commission and other regulatory bodies, so changing that into clinical space makes great sense,” said Allyson Hanson, CEO and executive director of the Illinois Medical District.
That switch is not always easy though, according to Janus, who said health system executives are being cautious about using space they have no way of filling given current staff shortages. He said internal goals by hospital executives aimed at decreasing at least 50% of administrative space is the biggest shift the healthcare industry is seeing.
To counter that, Hanson said, helping healthcare providers find new business models that reimagine methods of care and patient services in the face of staff cuts and downsizings is paramount.
Telemedicine is one way industry providers continue to optimize in the face of consumer needs. That means the tech CRE brings in must be on point.
Michael Becker, senior director of real estate services at Anne & Robert H. Lurie Children’s Hospital, told the panel that the percent of people communicating with clinicians virtually is up, even now as panic over the pandemic winds down, adding there is particular room for growth when it comes to behavioral health-based services.
“Basically we’re stable at pre-pandemic levels and we’re now stable at 7% of total visits so our use has doubled in a couple of years,” Becker said. “I see that continuing to grow, but not dramatically, at least not in the next five-10 years.”
Becker said that though telemedicine ramped up from 3% to 40% at the height of the pandemic, it was hugely challenging for the hospital’s technology team. While incorporating tech is important, he said, brick-and-mortar facilities will still carry the industry.
In fact, demand for medical office buildings continues to drive new construction activity and acquisitions across Chicagoland. And while cap rates have risen on average, they have continued to compress for on-campus medical office buildings which set record highs for asking rents and sales volume in 2021, despite pandemic stressors. A similar resiliency is expected to persist into the near future.
“Medical office as compared to office or retail or some of the other food groups is still considered a better investment and will weather this turn better,” Janus said.
Source: Bisnow
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