Medical Office Building Market Overview

Market Rends and Key Takeaways – From Colliers International Medical Office Buildings 2015 Outlook

There are three basic types of MOBs:

  • Class A: Modern, glass and stone exterior, recently constructed buildings located immediately adjacent to a hospital or a major
    clinic, usually developed for the hospital or leased from a parent corporation.
  • Class B: Low- to mid-rise, well-managed and well-appointed buildings located either on a hospital or a medical center’s campus,
    or within close proximity. The owners of these buildings may be a hospital, physician partnership, or individual investors.
  • Stand-alone: Small buildings usually built to accommodate a single or group practice. Typically the physicians own the building.

2015 Market Trends* Key Takeaways

  • Despite uncertainty regarding the full impact of the Affordable Care Act (ACA), overall tenant demand for healthcare real estate continues to increase. That demand is supported by expectations of an increase in the number of people insured and the aging of the large baby boom population.
  • Medical office vacancy rates are at the lowest level since the recession and continue to decline. However, the market is bifurcated with higher vacancies in older, less adaptable buildings.
  • Absorption continues to increase.
  • Modern, flexible, well-located spaces that facilitate collaboration and are capable of handling rapid changes in technology are in the highest demand.
  • Both the amount of new supply coming online and the amount of space under construction have been trending down since the recession and has remained low.
  • Rents have remained stable, in part due to the low interest rate climate.
  • Investor demand in the medical office asset class remains strong, particularly for investment or near-investment grade properties.
  • Capitalization rates continue to compress from already historically low levels. A bifurcation exists, however, with a wide spread between cap rates for investment-grade product and below investment-grade properties.

Medical office is expected to continue to grow in 2017 and into the future as the percentage of healthcare spending increases as a percentage of Gross Domestic Product (“GDP”) and the population continues to age.

Reasons to invest in Medical Office Properties:

  • Healthcare spending accounts for 18% of GDP.
  • Healthcare is expensive and additional costs are shared by consumer, insurance carriers and Medicare/Medicaid.
  • Baby boomer generation is aging and the life expectancy is increasing.
  • The growing population of Americans age 65 and up is expected to double by 2030 and by 2050, as many as one in five will be older than 65.

Impact of Healthcare Reform:

  • Larger practice groups are consolidating into larger national specialty groups.
  • Private physicians and practice groups are consolidating with hospitals.
  • Practice groups are moving into newer, more efficient, cost effective space under hospital leases.
  • Hospital systems are merging to create centers of excellence.

Historic Trends

  • Per Real Capital Analytics’ national survey data indicates cap rates for MOB properties averaged 7.0% in 2015, with an average on campus cap rate of 6.6%.
  • Newer facilities in urban primary markets with leases extending 10 years or longer generally have traded in the low-6.0% range, with top-tier assets trading in the 5.0% range.
  • Newer facilities in secondary and tertiary markets have historically traded at least 100 bps higher.
  • Assets with shorter leases typically trade in the high 7.0% to low 8.0% range depending upon the strength of the properties surrounding demographics.