Demand For Medical Office Buildings Rise As U.S. Population Ages

According to a new report from CBRE, the aging U.S. population, pressure for healthcare providers to cut costs and new technologies have boosted demand for medical office properties in recent years.
The U.S. Census Bureau estimates that the 65+ population will nearly double between 2015 and 2055 to more than 92 million and comprise nearly 23 percent of the country’s total population by that time.

“The steep increase in the 65+ population and anticipated greater need for in-office physician services by this group signals a continued increase in demand for healthcare services and medical office space in the years ahead,” said Andrea Cross, Americas head of office research, CBRE.

The overall U.S. medical office building vacancy rate was 8 percent in Q1 2017, down by nearly 300 basis points from Q1 2010, and significantly below the vacancy rate for the U.S. office market overall (13 percent in Q1 2017). The pace of vacancy rate decrease accelerated in recent quarters due to stronger user demand, likely driven by the aging U.S. population and increase in the ranks of the insured. The national vacancy rate decreased by the same amount during the past nine quarters (140 bps) as during the prior four years, despite a slight increase in new medical office supply during the past few years.
Investment in the U.S. medical office sector increased substantially over the past seven years. Total U.S. investment volume in medical office buildings of at least 10,000 sq. ft. rose from just under $4 billion in 2010 to $10.2 billion in 2016. Moreover, total investment in 2016 exceeded the prior annual peak of $7.3 billion in 2006, further reflecting increased optimism in medical office and not simply improvement from the recession.

The Evolving Healthcare Landscape

Healthcare providers are facing increasing pressure to reduce costs in the face of uncertain reimbursement rates from both Medicare, Medicaid and private insurance companies and improve patient outcomes. Adopting new technologies is one method for improving healthcare outcomes, but the upfront capital required means that costs must either increase or be trimmed elsewhere. Several key ways in which healthcare providers are attempting to reduce costs are by relocating services closer to where patients live, utilizing video technology to meet with patients remotely and moving more patient volume away from hospitals – the highest-cost facilities – and into lower-cost outpatient facilities, including medical office buildings and urgent-care facilities.

“The evolution of medical technologies is boosting demand for newer product with the infrastructure capable of handling cutting-edge devices and systems,” said Jim Hayden, executive managing director, Healthcare, Global Workplace Solutions, CBRE. “Medical office space that helps providers minimize costs and maximize outcomes, including buildings that support collaboration and can accommodate new technologies that help them achieve these goals, will likely remain in favor.”

Leasing Trends

The five markets with the lowest Q1 vacancy rates were Nashville (2.8 percent), New York (3.2 percent), the San Francisco Bay Area (4.2 percent), Louisville (4.9 percent) and Kansas City (5.5 percent). Nashville registered the strongest medical job growth and New York the fifth strongest over the past five years, contributing to their low availability rates.
Overall asking rents for medical office properties have remained relatively flat for the past seven years, ranging between $22 and $23 per sq. ft. per year. This trend reflects sustained demand for healthcare despite the recession, as well as the relative stability of the medical office tenant base. Specifically, the high cost of tenant build-outs, as well as the importance of proximity to a provider’s patient base and ancillary medical services, compels many tenants to remain in place for long periods of time.

Capital Markets Trends

“As investor appetite for healthcare-related real estate has grown, medical office buildings have emerged as the most popular property type within the sector,” said Chris Bodnar, executive vice president, Healthcare, CBRE Capital Markets. “As yields for traditional real estate asset classes have compressed in recent years, new capital sources–including foreign capital–have entered the medical office sector in search of stability to hedge against any potential correction in the global markets.”

Medical office cap rates have consistently decreased from a high of 8.3 percent in mid-2010 to 6.8 percent as of Q1 2017. On a regional basis, average cap rates have been lowest in the West over the past seven years, below the U.S. average by about 60 bps. However, the spread between the highest and the lowest regional cap rates remained relatively tight during this period, as industrywide trends have a similar impact across the various markets.

“Comparatively moderate regional differences are an attractive feature of medical office as an investment class,” said Lee Asher, executive vice president, Healthcare, CBRE Capital Markets. “Because there is demand for healthcare everywhere, investors are generally more willing to look outside the primary markets compared with traditional office investment, and this is apparent in pricing metrics.”

Source: World Property Journal

Cap Rates Drop As Competition For Medical Office Buildings Heat Up

When Physicians Realty Trust announced a purchase of 18 medical office facilities located in eight states for about $735 million last month, the Milwaukee-based REIT didn’t just sweep up prime properties. It won a round in the business of investing in medical office buildings (MOBs), which has become increasingly competitive.
The pending purchase includes the Baylor Cancer Center in Dallas, Texas. In a statement, executives with Physicians Realty described it as an on-campus medical office building consisting of about 458,396 net leasable sq. ft. At a purchase price of $290 million and after closing, the unlevered cash yield is expected to be 4.7 percent.
The intense vying for urgent care centers, surgery centers and other outpatient medical facilities is also driving down cap rates in the sector. Cap rates on MOBs tightened to 6.5 percent in the fourth quarter of 2016, after holding steady at 6.7 percent for the three previous quarters, according to the latest information from Revista, an Arnold, Md.-based property research firm that examines all out-patient medical properties. In its cap rate report, Revista examines a relatively small sampling of four transactions in four quartiles.
Its analysis found that tightening occurred for almost all segments of the market. Among the deals with the lowest reported cap rates in the fourth quarter of 2016, cap rates averaged 4.2 percent, down from 4.4 percent the quarter prior and 4.7 percent the year prior. On transactions in the 25th percentile, with the highest cap rates, cap rates averaged 7.0 percent, flat with the quarter prior. Median cap rates averaged 6.4 percent, down from 6.6 percent the quarter before.
The tightening is an indication of keen interest among domestic and international investors, all vying for purchase opportunities that seem too scarce.

“There has been a lot of demand,” says Hilda Martin, a principal at Revista. “A lot of new investment groups are entering the sector. There is more demand for less and less opportunity, and it’s just very competitive out there now.”

The Private Equity Gaze

Private equity firms are a relatively new investor group that has been particularly eager to scoop up quality MOBs, according to Martin.

“They have historically been running at the $1 billion a year mark in acquisitions,” Martin says. “That has bumped up to $5 billion on an annual basis more recently. There is more interest—and they are not selling as much as they are buying.”

The recent upturn has been in place for about 12 to 18 months, Martin estimates. The interest among those companies is even prompting private equity firms to extend hold periods beyond the customary seven or eight years. The firms are drawn to the medical sector because it is a very stable segment. Medical practices tend to sign long-term leases and have stable occupancy and vacancy rates, too.
Private equity groups are not the only investor group circling the segment. Virtually all institutional investors, REITs, private capital investors and developers recently surveyed by real estate services CBRE indicated that MOBs meet their acquisition criteria, with 97 percent saying they preferred the property type.
The CBRE U.S. Healthcare Capital Markets 2017 Investor & Developer Survey was sent to investors and developers and received 91 total responses. Respondents indicated that:
-Their firms had allocated $14.9 billion in equity to healthcare real estate investment and development for 2017.

The market cap rate for MOBs falls between 6.0 percent and 6.5 percent, according to 39 percent of respondents, making it the most aggressively priced property type.

-They are in the market to be net buyers, according to 78 percent of respondents.
-About 27 percent of investors and developers require a minimum ground lease of 60-29 years for an investment.
-As for how cap rates are expected to move in the sector, the experts see more competition—and potential compression—ahead.

“A lot of companies are looking for sweet off-market deals that no one knows about,” Martin says. “That tends to be the sentiment when people are calling up, ‘Where can I find the opportunity?’”

Source: NREI

Strong Demographic Trends Drive Investment Activity In Medical Office

medical real estate investment

As the 65-and-older age segment increases by 20 million individuals over the next 10 years, demand for healthcare services will rise, which attracts investors to the long-term growth potential of medical office real estate. Institutional funds and REITs are actively searching for larger healthcare deals and portfolios, and private capital is emerging as a major option in the $5 million to $20 million-price range and could begin to take a larger share of transactions this year, according to Marcus & Millichap’s National Medical Office Research report.
A rise in crossover capital is also increasing competition for medical office properties as single-tenant retail investors target similar investment opportunities in this segment for higher yields. For-sale inventory is limited as medical office assets are in high demand with cap rates compressing over the past several years.
On-campus medical office buildings command top cap rates, trading at sub-6 percent initial yields for single-tenant properties, while multi-tenant buildings draw first-year returns in the mid-6 to low-7 percent range, according to the report.
Off-campus medical office properties with strong tenancy, which often include a healthcare system and long remaining lease terms, are in high demand. These properties fetch initial returns in the mid-6 percent area.
Yields on other off-campus medical assets, including those in need of repositioning or located in secondary or tertiary markets, can trade up to 200 basis points higher. Factors such as quality, location, deferred maintenance and tenancy have an impact on returns for these assets.
Design, Building Amenities
The impact of an aging population and generational drivers on the design of medical office space has been realized in recent years as builders conform to the standards of a patient-centered approach to healthcare and advances in technology. Large healthcare providers are acquiring and expanding services off campus and closer to residential areas, providing patients easier access to care.

This has prompted the development of ambulatory surgery centers, standalone emergency rooms and large multi-tenant medical office buildings. As the way people seek medical care and how they approach changes, developers must keep up by offering flexible floorplates, convenient locations and amenities such as lean design, up-to-date technology and green building features.
Last year, medical office builders completed 7.5 million square feet of space, concentrating on markets located in the Southeast and West South Central regions, according to Marcus & Millichap. Approximately 50 percent of last year’s deliveries were located in the southern United States. The Marcus & Millichap report forecasts that more than 8.5 million square feet of completions are slated for 2017.
Absorption Concentrated in Newer Properties
The combination of reduced deliveries since the recession and strong demand from providers seeking space in recently completed medical office buildings has concentrated absorption in properties constructed since 2000. Vacancy at these properties has fallen more than 500 basis points since 2010, and constricting vacancy in these buildings will drive additional deliveries over the next several years.
With the majority of space demand channeling into newly built properties, older-vintage assets will bear the brunt of attrition as private physicians retire and private practices are acquired and consolidated into hospital systems preferring newer buildings.
Vacancy has been flat over the past few years for properties built before the 1980s, but a significant number of assets built during this time are trading as investors seek opportunities to create value. Updated buildings will attract tenants in search of more modern amenities in areas closer to hospitals or medical office campuses.
Strengthened demand for medical office space during 2016 pushed down vacancy 80 basis points, ending the year at 8.2 percent, the lowest rate in the past 10 years, according to Marcus & Millichap. The Central Plains region realized the strongest decline in vacancy, tumbling 150 basis points to 4.6 percent and boasting the tightest regional vacancy rate in the country.
Rent advances persist, but growth restrained by changes in healthcare landscape. Hospital acquisitions of private practices and the move of outpatient services away from campuses and closer to where patients live and work are placing major medical providers in control of a large share of leasing activity. As a result, overall rent gains are trekking along at a modest and steady pace.
Despite space demand funneling into newer-vintage buildings, advances in marketed rent for these properties has ticked up just 0.6 percent since 2010.
Rent for buildings constructed prior to 2000 has produced the strongest gains, rising nearly 3.5 percent over the past six years.
Overall, medical office rental rates advanced 0.4 percent during 2016, reaching $22.74 per square foot at the end of the year, according to the report. The strongest increases recorded during the annual time frame occurred in the California and Mountain regions, advancing 1.3 percent and 1.2 percent, respectively. Just two regions, the Pacific Northwest and West South Central, realized declines over the 12-month period.
Source: REBusiness

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