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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

Medical Office Space Still Steady, Revista Says

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This might be considered a somewhat boring news lead: Most of the statistics used to reflect the state of the medical office building (MOB) sector, including occupancy, construction completions and starts, absorption of new space, the sales volume and pricing, remained steady in 2020.

Boring? Far from it, lest we forget that the past year included a worldwide disruptor and health crisis the likes of which most of us have never experienced in our lifetimes and, hopefully, never will again.

And yet, MOBs continue to march on their steady course, according to data presented during a recent virtual presentation by Arnold, Md.-based Revista, a firm that compiles nationwide healthcare real estate (HRE) facilities information for its subscribers, with a heavy focus on MOBs.

For the third straight year, private equity (PE) buyers dominated the MOB sales acquisition market in 2020. As a cohort, PE firms accounted for 69 percent of the MOB sales volume in 2020, up from 68 percent in 2018 and 55 percent in 2019. (Source: Revista)

As noted, the occupancy of MOBs throughout the country – Revista’s data was focused on the top 50 markets – stood at 91.4 percent on a trailing 12-month (TTM) average as of the end of the fourth quarter (Q4) of 2020. That was the highest occupancy rate since Q1 2019.

In addition, the absorption of space by MOB tenants in the top 50 markets remained strong throughout 2020, with three of the quarters seeing absorption numbers topping 4.1 million square feet. Only Q3 saw a drop in those numbers, with just 600,000 square feet being absorbed in a drop that was most likely caused by disruptions related to the COVID-19 pandemic.

“So, when we look at these metrics, you can look at the TTM occupancy stat, and you can see it is really remarkably stable, especially during this pandemic that has unfolded during 2020,” said Revista Principal Mike Hargrave. “You can see that absorption is generally, especially in 2020, outpacing completions.”

Revista presented these MOB statistics and more during a virtual presentation Jan. 26 as the first installment in a series of six such webcasts it plans to present during the next six months. As a result of the pandemic, Revista’s “Content & Connections: A Virtual Event Series” takes the place of the firm’s annual in-person conference typically held in late January.

The Jan. 26 event was titled, “Medical Real Estate Facts, Trends & Top Markets 2021: A Stable Asset Class in Uncertain Times.” Moderated by Murray W. Wolf, founder and publisher of Healthcare Real Estate Insights™, the session included presentations by Revista principals and co-founders Hilda Martin and Mr. Hargrave. Virtual audience members also asked questions.

In other data presented, Revista noted that MOB sales in 2020 totaled $10.2 billion, marking the seventh straight year the volume has topped the benchmark figure of $10 billion.

According to Ms. Martin, the $10.2 billion in MOB volume in 2020 can still be considered “preliminary” as of late January, with more transactions likely to come to light and be calculated by the firm’s research team.

“We had such a flurry of closings happen at the end of December, and we are still parsing through those,” Martin said. “There are still more (transactions) coming in, so this ($10.2 billion figure) is definitely going to be revised upward. I wouldn’t be surprised if it doesn’t get close to or surpass $11 billion, which is right in line with what we’re typically seeing (in recent years) in the sector. So, considering the year we’ve had in 2020, with all the shutdowns, with so many people working from home, so many places seeing COVID spikes, it’s pretty amazing to see this amount of activity in the sector and so much interest.”

Ms. Martin referenced a few of the larger deals taking place late in the year, including December.

“Welltower (NYSE: WELL) increased its liquidity (with) two large portfolios that they sold a significant stake in,” Ms. Martin noted, “but which they still manage. One was with Invesco for $850 million, another one with Wafra for $550 million, although part of that is going to be closing in 2021.”

Other big deals included a $605 million transaction in which Chicago-based Remedy Medical Properties and its joint venture (JV) partner, Boca Raton, Fla.-based Kayne Anderson Real Estate, acquired 29 MOBs from Milwaukee-based Hammes Partners.

“We’re going to be having a session focused on noteworthy deals coming up next month,” Ms. Martin added, “and we’ll have a panel of speakers in taking a bit more of a deep dive on some specific transactions from 2020. So, don’t miss that.”

When it comes to pricing for MOBs that sold during 2020, Revista’s data indicates that capitalization (cap) rates, or first-year estimated returns, remained steady in 2020, with the median dropping to 5.9 percent on a TTM basis after remaining above 6 percent for the past 11 quarters.

Only the top 25th percentile of MOB deals – the priciest – saw an increase in cap rates or a drop in pricing. Revista’s data indicates that the average cap rate for the top quartile of deals in Q4 2020 increased to 4.6 percent (TTM) after hovering around 4 percent for the past dozen or more quarters.

“Pricing is still very competitive,” Ms. Martin said. “We actually saw a compression towards the end of the year. For the top 75th percentile, the median cap rate was 5.5 percent – I mean you’re talking about a quarter of the trades in 2020 took place under a 5.5 cap.”

Other Topics Covered

During the presentation, Ms. Martin and Mr. Hargrave presented plenty of additional 2020 statistics concerning MOBs. Here’s a look at some of them, with a focus on the sales market:

■ Los Angeles was the most active market in terms of MOB sales in 2020. The market saw an MOB volume of $767.9 million in 2020, with cap rates averaging 5.5 percent and an average price per square foot (PSF) of $464. Greater Los Angeles far surpassed other markets, including those in the top five for MOB sales volume in 2020: Houston with a volume of $358.1 million; Miami, $344.1 million; Dallas, $328.3 million; and New York $302.5 million.

■ With California struggling for much of year with the COVID-19 pandemic, the Los Angeles MOB market has experienced some “negative absorption,” Ms. Martin noted, “and yet Los Angeles’ MOB sales volume was almost double the runner-up in terms of closings last year. So, it’s clearly had no effect in terms of sales activity in that market … and I know you’re probably saying, ‘Okay, well Los Angeles is just really expensive.’ But look at the square footage, as 1.7 million square feet traded in Los Angeles. There was just a lot of activity … but the average cap rate was 5.5 percent and a lot of the deals that traded ran into the 4 percent range. So, it’s still very competitive (in Greater Los Angeles) and a lot of activity despite everything going on.”

■ The private JV partnership of Remedy and Kayne Anderson was the largest buyer of MOBs in 2020, making acquisitions totaling an estimated $1.5 billion, according to Revista. Rounding out the top 10 buyers were: Invesco, which made acquisitions totaling about $924 million; Montecito, $608 million; Healthcare Realty Trust (NYSE: HR), $487 million; Wafra Inc., $385 million; Anchor Health Properties, $341 million; IRA Capital, $254 million; Harrison Street Realty Capital, $232 million; Healthpeak Properties Inc (NYSE: PEAK), $196 million; and Global Medical REIT, $191 million.

■ For the third straight year, private equity (PE) buyers dominated the MOB sales acquisition market in 2020. As a cohort, PE firms accounted for 69 percent of the MOB sales volume in 2020, up from 68 percent in 2018 and 55 percent in 2019.

■ The country’s healthcare-focused real estate investment trusts (REITs) saw their total share of acquisitions in 2020 fall to a low point in the past five years. According to Revista, the REITs accounted for just 17 percent of all acquisitions in 2020, down from 32 percent in 2019. “The REITs were a little bit slower in 2020,” Ms. Martin said, “as all of the upheaval in the markets” caused them to take a bit of a pause. She added that the REITs were net sellers of MOBs in 2020, as they accounted for about 28 of the dispositions in the market. “A large chunk of that is going to be Welltower, but there certainly were other REITs refining their portfolios during 2020.”

■ While there was plenty of talk last year that hospitals and health systems seemed to be increasing the number of MOBs they were buying, the buyer type as a whole accounted for just 10 percent of the year’s volume – basically equal to 2019 and almost the same as in 2018, when health systems accounted for 11 percent of purchases. “However, (health systems) only sold 5 percent (of the dispositions), so they were actually net buyers during 2020. This is a trend that we’re keeping on top of because, ideally, you’re wanting to see them lose share in terms of ownership. You want them to sell more than they’re buying.”

For more information on Revista’s “Content & Connections” series, visit RevistaMed.com.

 

Source: HREI

Medical Office Building Sales Were $2B In 3rd Qtr., Occupancies Steady

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MOB sales have certainly been a bit sluggish since the onset of the COVID-19 pandemic, but not as slow as might’ve been predicted when the crisis first hit.

In fact, according to the latest MOB sales data from Arnold, Md.-based Revista, which provides a variety of HRE information for its subscribers, the volume was about $2 billion in the third quarter (Q3), matching the $2 billion recorded in Q2.

While the Q3 figure is still preliminary, it brings the year-to-date volume for 2020 to about $7.2 billion. It should be noted that Revista’s statistics include only sales involving “pure” MOB outpatient facilities (not administrative buildings) topping $2.5 million.

“Total volume is actually holding pretty steady,” said Revista Principal Hilda Martin during the firm’s Oct. 20 virtual 3Q Medical Real Estate Update and Outlook. “And if you look at the year-to-date total of $7.2 billion, that’s not far off from last year’s volume of $7.8 billion (through the first three quarters). In fact a lot of investors, such as Anchor (Health Properties); MBRE, now Remedy Medical Properties; Hammes; and Montecito Medical are remaining quite active.”

Ms. Martin was joined on the webcast, which provided a variety of MOB sector information and updates, by Revista Principal Mike Hargrave, as well as two executives, CEO Ben Ochs and James Schmid, the chief investment officer, with Media, Pa.-based Anchor Health Properties, one of the MOB sector’s most-active investors and developers in recent years.

Although the year-to-date volume is indeed stronger than what many might have anticipated at the outset of the pandemic, Q4 will need to be a strong one to keep pace with the MOB sales volumes of recent years, as Q4 2019’s volume was a robust $4.3 billion, bringing the year’s total volume to $12.2 billion.

Total MOB sales have topped $10 billion during each of the past five years, according to Revista data, with the past three years each topping $12 billion. The all-time best year recorded by Revista was 2017, when the MOB volume was $15.9 billion.

Mr. Schmid of Anchor, which expects to make MOB acquisitions totaling anywhere from $400 million to $500 million in 2020, said “The first half of the year, especially from February through June, saw a very limited amount of transactions. Some deals that had been under contract (prior to the pandemic) traded during that time, but there was a fair amount of disruption in the debt markets. And obviously, the equity REITs traded off for a good portion of that time, so it took a segment of the investment population out of the market. But our observation is that for the third quarter and the fourth quarter, people are trying to make up for lost time. And there was a lot of comfort gained with the performance of MOB owners’ portfolios during that time.”

Mr. Schmid added that he sees more of a return to “normal, historical volumes” in Q4, with a number of portfolio deals and recapitalizations taking place.

Cap rates have remained fairly steady so far in 2019, averaging about 6.4 percent for all deals, with portfolio transactions garnering a premium with an average cap rate of 5.9 percent.

Ms. Martin noted that private equity buyers have dominated the MOB investor pool so far in 2020, accounting for about 80 percent of the volume. Also, single property sales have accounted for about 65 percent of the volume so far this year.

Revista’s update and webcast included plenty of additional information and data about the MOB sector, including:

■ Demand remains very strong from a wide array of investors for MOBs nationwide, but particularly in the top 100 and top 50 markets, where cap rates have averaged 6.4 percent. Through Q3, MOB transactions have totaled $9.71 billion on a TTM basis in the top 100 markets, with Los Angeles leading the way with $818.9 million of volume and New York coming in at $755.9 million during that time. Los Angeles has had the lowest average cap rate in the trailing 12-month period at 5.5 percent, while Houston came in with the second lowest at 5.7 percent. “This sector has outperformed other types of commercial and residential real estate, and investor have gravitated toward stable cash yields and well-occupied buildings,” Mr. Schmid noted. “And like you said Hilda, the average deal in this sector is about $15 million to $20 million, and what that amounts to is a lot of capital chasing a lot of small transactions.”

■ The national occupancy rate for MOBs remains strong at 91.3 percent, which is basically the same, or close to, what it has been for the past nine quarters, according to Revista data. One of the reasons behind that steady performance is the strong absorption rate, which totaled 16.7 million square feet in Q3 on a trailing 12-month (TTM) basis. This absorption rate is the result of new MOB developments that were substantially pre-leased and delivered with high occupancies. “We’re just not seeing many tenants leave as a result of COVID,” said Mr. Ochs.

■ While year-over-year MOB rent growth in the country’s top 50 markets is slowing just a bit in 2020, it has remained relatively strong at 1.7 percent, compared with 2.1 percent a year ago in Q3 2019. The national average for triple-net MOB rents per square foot in the top 50 markets in Q3 2020 was $22.28 in Q3, according to Revista.

■ The market with the highest average triple-net MOB rents is Los Angeles, where the average PSF was $31.24 as of Q3. The next most-expensive market for MOB rents was Washington, D.C., with an average of $25.70 PSF, followed by New York at $24.60 PSF.

■ MOB construction remains strong. While Q2 and the start of the pandemic saw a slight slowdown in the number of projects started, Ms. Martin said there had already been a bit of a “pull back” at the beginning of 2020 after a strong finish to 2019. According to Revista data, 24.4 million square feet of MOB projects were started in Q3 on a trailing 12-month basis, with the amount of square footage underway during the quarter standing at 43 million, up from 41 million in Q2. Revista data also indicates the country is home to about 36,000 MOBs with a total of about 1.5 billion square feet of space. This typically grows by about 1.5 percent annually. “We saw several projects delayed in Q2, but those were mostly with lower-credit rated health systems,” Mr. Ochs said. “One has to remember that MOB projects are strategically purpose-built, and take a long time to bring to market as they are very carefully thought through from a programming of services perspective.”

■ As for the top MOB development markets, New York headed the list with 1.76 million square feet of space delivered in the four previous quarters including Q3. Houston was next with 672,456 square feet delivered in the last four quarters, followed by Chicago with 534,211 square feet of new MOB space. “We’re seeing strong development numbers in the country’s top 10 markets, with each of them seeing at least 200,000 square feet of new MOB space delivered in the last four quarters,” Mr. Hargrave said.

■ Employment in the ambulatory sector, which includes people working in MOB, surgery centers and other outpatient facilities, fell a whopping 17 percent from February to April, during a time when elective surgeries and procedures were shut down in most states. Since then, however, with most states opening up such procedures, employment in the ambulatory sector has nearly recovered all of those job losses, increasing by about a million jobs, or 16 percent, from April to September.

■ The use of telehealth, while still considered important now and for the future, is not likely to cut into the need for clinical space. According to data from Epic Health Research Network, the use of telehealth, or virtual doctor visits, accounted for about 70 percent of all outpatient visits in the early weeks of the pandemic. However, since then the trend has been reversed, with virtual doctor visits accounting for about 21 percent of all outpatient visits through July, according to Mr. Hargrave. Mr. Ochs noted, that “telehealth has played an important role during this time, and there are a lot of aspects of it that are here to stay.” He added that an oncologist told him that one of his patients, for example, has been able to avoid driving more than two hours for monthly follow-up visits. “But in other cases, in-person reviews with a doctor are necessary,” Mr. Ochs noted.

■ More and more investors as well as healthcare providers are preferring to invest in, or practice in, settings that are off-campus and away from urban cores, such as in suburban or tertiary markets. “It’s well-known that demand for health services moving to the suburbs and other markets,” Mr. Schmid said. “Healthcare services growth is chasing the rooftops and its mostly about wellness and keeping people healthy in order to avoid complications and more expensive (treatments) later on.”

 

Source: HREI