The U.S. Medical Office Market Could Be Heading For A Bubble

David Park now oversees construction for one of the 20 largest healthcare delivery networks in the United States, but he once handled the corporate real estate for BB&T. So when he looks out into the medical office building market, he calls it like he sees it: a potential bubble in the making.

Park said developers could be unleashing too many MOBs in some select markets.

“The real key is defining what the need is in a market,” he said, referring to how Novant selects locations in which to grow. “MOBs are not like bank branches.”

Park, a speaker at Bisnow’s Atlanta Healthcare Leadership Forum April 12, said at least two factors could create bubbles of oversupply in some markets: a population lull and changing technology.

Right now, the healthcare market has been riding a wave of growth buoyed not only by the Affordable Care Act adding people to the ranks of the medically insured, but also an aging Baby Boomer population, a group entering its senior years in record numbers and causing demand for healthcare to rise.

It is hard to argue the healthcare real estate market is not attractive at this point.

Beginning in 2011, the Baby Boomer generation started turning 65. And according to Pew Research Center, 10,000 Baby Boomers a day will turn 65 for the next 14 years. By 2030, 18% of the country will be 65 and older, and per-capita healthcare expenditures are on the rise.

As of 2016, an average American’s healthcare costs exceeded $10K, and they are expected to grow 5.8% a year through 2025, according to Colliers International.

Absorption in the country’s estimated 1B SF medical real estate market was 22.7M SF in 2016, a 25% jump from the year before, according to Colliers’ latest report. And construction is on the rise.

Another 20M SF of MOB expected to open in 2017. Both the number of facilities underway and those in the planning stages “has the potential to generate more than 1,400 new healthcare properties, 46% of which are MOBs,” with an average of 45K SF per office building, according to Colliers.

New hospital development is also becoming less prevalent: Eighty-three percent of the more than 280 projects last year were expansions of existing facilities, according to Colliers. At the same time, some 300 off-campus MOBs were set to deliver last year, “nearly three times the on-campus total.”

But what goes up must come down, Park said.

“At some point in time, what you start looking at is: When does that population growth, that bell curve, start down?” he said. “At some point, that number is going to drop.”

While Millennials rival the size of Baby Boomers at a population of roughly 76 million in the U.S., there is going to be a 20- to 30-year span where demand for medical services will likely diminish before Millennials reach retirement age and need more medical services, Park said.

Technology will be a another big driver for demand reduction of facility use, especially as it becomes more prevalent for patients to have a wellness check with a doctor over the internet.

Novant employs more than 2,500 physicians and 26,000 workers at nearly 500 locations, including 14 medical centers and strings of outpatient facilities in the Carolinas and Virginia.

Despite Park’s warnings, Novant is still growing its MOB footprint. Right now, the firm operates some 11M SF and has two hospitals underway in Clemmons and Mint Hill, N.C., Park said. The system is looking to expand by up to 20 MOB facilities, ranging from 1,500 SF to as large as 150K SF, he said.

Novant balances that growth, as a not-for-profit, between patient need in areas that may have diminishing population or demographic growth and areas that are seeing population growth.

Atlanta-based Eastwood Real Estate Services CEO Christine Gorham said despite the growth, physician groups are actually being cautious on new facilities. The costs to build an MOB are a turnoff for some medical groups.

MOB growth is happening in markets that will continue to command the overall U.S. population growth in the future. Where bubbles in the MOB market could occur is where population is going south, Gorham said.

As for Baby Boomers, she disagrees with Park’s notion.

Their peak is “not around the corner,” she said. “There’s still some runway on that growth.”

Source: Bisnow