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Medical Offices Ready For Spike In Record High Number Of Insured

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The total number of uninsured in the US has reached a new low and the medical office asset class stands to benefit from it, according to Marcus & Millichap’s 2024 National Investment Office Forecast.

This robust demographic will need and seek more visits to healthcare providers, subsequently driving tenant demand for medical spaces, particularly in markets such as Louisville, Seattle-Tacoma, Portland, and Boston.

Those areas have sub-6.5 percent vacancy rates. Texas has the largest percentage of uninsured residents nationwide and carries an office vacancy rate above 15 percent in San Antonio, Houston, and Dallas-Fort Worth.

Arizona and Nevada, too, have high uninsured populations, with vacancies in Tucson, Phoenix, and Las Vegas above 12 percent.

In Florida, some metros notably refute this trend as the state’s uninsured rate is over 11 percent, but West Palm Beach and Miami-Dade have some of the lowest vacancies among major U.S. markets. Medical office projects are slated to constitute approximately 70 percent of the space completed in Tampa this year.

In 2023, fewer medical office assets changed hands than in 2022. However, transaction activity is above the 10-year average in most regions. An aging population will necessitate medical office expansions long-term.

Marcus & Millichap cited a challenged borrowing environment and said this pressure will likely ease in 2024 as many investors expect interest rate cuts.

“Additionally, private investors have become more active in the space as institutions pull back,” according to the report. “Deals in lower price tranches have increased the use of seller financing in some cases, circumventing lender-based headwinds.”

The report said that the new supply would fall to a nearly two-decade-low construction as it will be reduced by 8.5 million square feet to approximately 500,000 fewer square feet of medical office space this year compared to last. This will push total inventory up by just 0.7 percent.

“Limited additions will prevent any major supply headwinds going into 2024 and beyond as new starts decrease as well,” according to Marcus & Millichap.

Vacancy rates will climb by 20 bps to about 9.8%, according to the report. Meanwhile, medical office tenants will still grapple with a prevailing labor shortage, complicating operator expansion plans.

The average asking rent for medical office space will rise by 1.3% to $23.40 per square foot by December as new buildings come online, reaching a more than two-decade high. Metros such as West Palm Beach, Salt Lake City, and Portland are expected to lead the nation in rent growth, concurrent with local vacancy rates below the national average, according to the report.

 

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.

Medical Office Real Estate Demand Is Outpacing Supply In Dallas-Fort Worth

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Medical office space vacancy rates in Dallas-Fort Worth are more than a percentage point below the five-year average as demand remains strong in the region, according to a report from Transwestern.

The report says that the DFW market is undersupplied, but as rents rise, new construction may become more feasible in the future. Interest rates and material costs are rising, which has slowed down all new construction, and the medical office building space is no different. While rent is growing, it hasn’t kept up with other costs, so underwriting for new construction has been more difficult. But if the limited medical office space remains with increasing population in the region, rent prices will rise until new construction can be justified, the report says.

Prior to the pandemic, Dallas was the country’s second-most active medical office building construction market, behind only New York.

“There’s a definite need for increased health care services, more hospital campuses, and more doctors’ offices, but also the real estate that can house them,” says Andrew Matheny, research manager for Transwestern. “When you set that against the construction levels that have been declining over the last couple of years, that’s going to be a significant driver of rents and new development here in the next few years.”

While square footage under construction and 12-month deliveries are down compared to a year ago in the medical office space, those figures could soon be trending in the opposite direction. Vacancy rates in DFW are at 10.2 percent and were 11.6 percent one year ago. Gross rents are also up nearly 3 percent compared to a year ago.

The healthcare market overall continues to grow. Employment for the hospital space is up 4 percent compared to a year ago and 10 percent for other ambulatory service markets. Total available space is at 13.8 percent, which is below the five-year average for the region.

“In the last three to six months, we’re starting to see transactions come through that are bringing revenue in line with these higher costs,” Matheny says. “That may need to happen here for another couple of quarters before we start seeing more groundbreaking projects.”

South Dallas, in-town Dallas, and along the Dallas North Tollway have some of the lowest vacancy rates in Dallas, though there are zero projects under construction in-town and South Dallas, with just 21,000 square feet under construction near the tollway. In the Frisco/Legacy region, there are more than 150,00 sf under construction, but it has one of the highest vacancy rates in the region, at 13. 9 percent. The East Dallas suburbs (17.3 percent) and Grapevine/Southlake (23.1 percent) have higher vacancy rates than Plano/Legacy.

If the market responds as Transwestern is predicting, the new hybrid work environment will probably play a factor.

“If people are spending more time at home, they’re probably going to prefer to see physicians and providers that are close to where they live, so we may see a geographic rebalancing of health care services close to where people live,” Matheny says.

This trend is already making waves with the growing presence of urgent care centers, retail clinics, and free-standing emergency rooms popping up closer to where people live. Hospitals, too, are moving more services away from central hubs and into ambulatory care facilities. It isn’t just more convenient; caring for people outside the hospital is also cheaper.

Telehealth has surged during and after the pandemic, but Matheny doesn’t see it significantly impacting the medical office market.

“While it may allow a physician to reach more people without coming in, physicians still need physical spaces where they can see their patients face to face,” Matheny says. “From a leasing perspective, it’s been a very busy medical office space. There is a demand for it, and I think people want to see their doctor in person.”

 

Source: D CEO Magazine