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Why Experts Say Now Is The Time To Buy Medical Office Buildings

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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

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.

CVS Considering $10B Purchase Of Oak Street Health

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CVS is reportedly looking to expand its healthcare offerings by purchasing Oak Street Health.

The acquisition would value Oak Street at more than $10 billion, Bloomberg News reported late Monday (Jan. 9), citing sources with knowledge of the matter who said talks between the two companies are ongoing. PYMNTS has reached out to both companies; CVS declined to comment and Oak Street did not reply.

The deal would further expand CVS’ move into the world of primary care. The pharmacy giant last year agreed to purchase Signify Health in an $8 billion deal.

Headquartered in Dallas, Signify has a network of 10,000 medical professionals in all 50 states and uses analytics and technology to offer in-home care to health plans, employers, physician groups and health systems.

“This acquisition will enhance our connection to consumers in the home and enable providers to better address patient needs as we execute our vision to redefine the health care experience,” said CVS Health President and CEO Karen S. Lynch. “In addition, this combination will strengthen our ability to expand and develop new product offerings in a multi-payor approach.”

Last year also saw the debut of CVS Health Virtual Primary Care, a virtual care solution available through a digital platform.

“The program connects CVS Health’s services, clinical expertise, and data for a more coordinated and consumer-centric health care experience,” CVS said in May 2022, adding it “enables consumers to choose care when and where they want, continuing CVS’ shift into primary care.”

The company was also considering the purchase of Cano Health, which operates primary care centers in eight states and works mostly with patients from the Medicare Advantage program.

Oak Street, founded in 2012, serves Medicare recipients and has locations in 21 states, according to its website. It specializes in preventative care, “including personalized wellness plans, integrated health services, and educational and social activities,” the website says.

And CVS isn’t alone in shifting more directly into healthcare. As PYMNTS noted in September of last year, “Big Retail” has helped usher the healthcare industry fully into the 21st century.

“For the Walmarts and the Amazons of the world, offering value care and virtual care creates a new avenue to connect payments to a broader ecosystem,” PYMNTS wrote.

To that end, Walmart joined forces with UnitedHealth Group in a deal that, among other things,  offers virtual healthcare services through a 10-year partnership. Amazon, meanwhile, announced last July that it was purchasing tech-powered primary care provider One Medical for about $3.9 billion.

 

Source: PYMNTS