The Jupiter, Florida-based real estate investment company will use the funds to acquire health care facilities in Texas, Ohio and Connecticut — one facility each. Healing Realty Trust is focused on developing real estate for clinics that house novel behavioral health treatments, especially psychedelic-assisted therapies.
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.
Medical office buildings have emerged as a favorite among investors interested in single-tenant net lease opportunities, according to a new report from Colliers.
Overall, the STNL space posted strong performance in the first half of 2022 and hit a historic high of $40.1 billion in investment sales, according Colliers. However, volume in Q2 fell 35% over Q1 numbers and 17% year-over-year.
Despite that, the medical sub-sector remains strong. Colliers’ Jay Patel cites as one reason “predictable” cash flows and the price range on assets that appeals to both institutional and private investors alike. In addition, there’s COVID-19:
“Pandemic investors flocked to the medical office sector for its perception as a safe, interest- resistant and now pandemic-resistant asset,” Patel says. “During the pandemic, investors were eager to snatch up anything medical-related regardless of lease term, credit, and location.”
Construction pipeline delays have also contributed to an ongoing chasm between supply and demand, which has compressed cap rates.
“Net lease has also risen due to the ongoing supply chain disruptions, slowing the delivery of new product,” Patel says. “This has pushed more healthcare tenants to consider alternative space solutions like the adaptive reuse of traditional office or retail properties.”
Of course, the capital markets have changed this year — and medical office isn’t immune to those shifts. Patel notes that “while capital is still being deployed, investors are no longer scooping up just anything that’s healthcare assets.”
“Buyers are now taking a closer look at credit, lease terms and location. With inflation looming in everyone’s mind, assets that have strong rent increases are experiencing stronger activity,” Patel says. “To bridge the gap for investors that are feeling the burden of this rising interest rate environment, many developers and sellers are starting to shift pricing, which is creeping back toward pre-pandemic standards.
Colliers Julie A. Johnson predicts the asset class will continue to be strong in the near future despite rising capital costs.
“The past several years have been banner years for investors with historically low cap rates and many more buyers in the market than sellers,” Johnson told GlobeSt.com in an earlier interview. But “medical office buildings will continue to be strong with not only the increase of the senior population but also the population increase in many markets, specifically the Sun Belt cities.”
Patel says good lease terms and credit will be critical moving forward into 2023. While previously just one of those elements was needed to sell a property.
“Today’s market conditions necessitate all three factors carrying equal importance when appealing to investors,” Patel says.
Source: GlobeSt.
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