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As Medical Office Space Emerges From Pandemic Supply Will Be A Problem

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While medical office buildings sales volume declined in 2020, it was much less of a drop than the other commercial real estate sectors, according to a report from Colliers.

MOB investment decreased 12.2% year-over-year in 2020 to hit $11.1 billion, according to Colliers, while cap rates fell 20 basis points to 6.5%. By comparison, commercial real estate posted a 32% decline in sales volume overall.

Like many sectors, MOB saw an increase in activity in Q4. Sales volume rose from $2.1 billion in Q3 2020 to $3.6 billion. With 67% of total volume in 2020, private equity led the acquisition activity.

On a metro level, Los Angeles led in sales in 2020 at $812 million. It was followed by New York City at $644 million, the D.C. metro at $422 million and Chicago at $401 million.

The west paces in the country in MOB pricing at $374 per square foot. The Midwest and Northeast followed at $331 per square foot and $326 per square foot, respectively. For the Mid-Atlantic, Southwest, and Southeast, pricing ranged between $260 and $300 per square foot.

In Q4, cap rates were lowest in the Southeast at 5.9%. Next was the Southwest at 6.4%. The Northeast posted the highest MOB cap rates at 7.8%. On the best assets, Colliers says sub-6% cap rates were reported for multiple transactions. For instance, a MOB sold in Palm Beach last September 2020 at a quoted cap rate of only 3.9%.

“Cap rate stability reflects the continued desirability of healthcare as it became one of the most essential sectors in 2020,” Colliers said in the report. Investors view it as a relatively safe and durable investment even in times of economic uncertainty. Healthcare real estate continues to be firmly established as a separate asset class within the real estate sector.

As investors look to the asset class this year, they will find that supply is an issue in the medical office sector.

“Apart from new construction, the US MOB market has a relatively limited supply of investable inventory,” according to Colliers. “Healthcare systems and providers hold nearly two-thirds of all healthcare real estate.”

While 30 million new square feet of new medical office space will create upward pressure on vacancy rates in 2021, demand is still projected to outpace supply.

While there might be some conversion of other uses into medical office buildings to increase supply, these transitions are difficult.

“It’s really not that easy,” Pete Bulgarelli, president and CEO of Lillibridge Healthcare Services and executive vice president, office, Ventas, said on CBRE’s ‘The Weekly Take’ podcast.

Medical users have different demands.

“The ways that physicians deliver care and utilize their space is much different than traditional office,” says Christopher Bodnar, vice chairman and co-head of healthcare and life sciences capital markets, CBRE.

 

Source: GlobeSt.

Healthcare Real Estate Execs Foresee A Big Year For Medical Office Buildings

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For the past several years, professionals involved in the medical office building (MOB) sector have been saying that, aside from an economic downturn or total transformation of the healthcare system, there is just one thing that could slow the growth and success of the product type: a black swan event.

Well, from a business and economic perspective, the COVID-19 pandemic is the very definition of a black swan: an extremely rare, unanticipated event that caused widespread and catastrophic economic damage.

However, not only has the MOB product type survived seemingly unscathed, but it has thrived and even become a more desirable investment property type among an ever-growing pool of capital sources.

“As we’ve now seen going through a … few black swan events, I mean, these are resilient asset classes,” said Christopher Merrill, chairman and CEO of Chicago-based Harrison Street, a real estate investment firm he co-founded in 2005 and which has more than $32 billion of assets under management, with a strong focus on healthcare.

 

Source: HREI

Medical Office Building Sales Fell Nearly 50 Percent In Q2, But The Sector’s Outlook Is Strong

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The volume of MOB investment sales transactions in the second quarter of 2020 totaled around $2.2 billion, a 43 percent decrease compared to a year ago. In the first quarter of 2020, MOB investment sales volume reached $3.7 billion, according to data firm Real Capital Analytics (RCA).

The CoStar Group, another provider of commercial real estate data, pegs MOB investment sales volume at around $2.1 billion in the second quarter, a drop of 54 percent from $4.7 billion from a year ago.

“The volume of sales has absolutely hit pause, it hit the brakes really hard in the second quarter. You saw a significant drop in sales volume,” says Keith Pierce, research manager for Southeastern region with real estate services firm Transwestern. “The price per square foot did not really shift that much for those sales that did close. But by and large, just everybody froze in late March and largely stayed frozen until sometime in June.”

Average cap rates on transactions involving MOB assets remained at 6.6 percent at the end of the second quarter, flat with the figure from a year ago and the first quarter of 2020, according to RCA. CoStar pegs average MOB cap rates at 6.7 percent, also registering no change from the previous quarter.

“I anticipate seeing somewhat of a flattening,” says Russell Brenner, president of the medical office and life sciences division with real estate investment firm CA. “Once the market truly opens up again and lenders, which have been very selective in where they lend, come back into the market in droves and in a more significant way, I think you may well see cap rates continue to fall. But for probably the next two three quarters, I think it will be a largely flattening of cap rates.”

Earlier during the pandemic, many Americans largely postponed elective procedures, which put a dent on revenues for medical office tenants. But in states where those facilities are reopening, industry sources are reporting pent-up demand.

“We saw very few delinquencies, perhaps a handful of rent deferral requests, but by and large, the healthcare medical office tenancy as a whole stood up very well,” says Brenner. “Certainly now that elective procedures are back on in most parts of the country, MOBs are poised to bounce back and will continue to be a stable and reliable asset class.”

“Medical practices are running at 90 to 95 percent of pre-pandemic levels,” says Steve Hall, senior managing director for healthcare advisory services at Transwestern, who expects this level of demand to continue through the end of the year.

“Many of the company’s tenants are back to 80 percent of pre-pandemic levels of procedures and services,” says Jon Boley, senior vice president of acquisitions and development for HSA PrimeCare, a firm that develops, leases and manages medical facilities.

“The reason these businesses are not back to 100 percent is because they are having to do above-standard cleaning in order to disinfect surgery centers throughout the day,” Hall notes. “A factor that will shore up MOB assets in the future is the dearth of new construction happening right now. During a pandemic, a lot of people aren’t pulling the trigger on a brand new construction. The lack of construction going on right now I think is really going to keep the market strong since there is not going to be oversupply.”

 

Source: HREI