Medical Office Buildings Show Resiliency Post-Pandemic

Medical office buildings (“MOBs”) have increasingly become a targeted asset class for institutional buyers of real estate due to their stable demand, long-term leases, creditworthy tenancy, and purpose-built infrastructure. The growing number of institutional investors seeking opportunities in this market led to an all-time high in transaction pricing and volume in 2022, peaking at $397 per square foot (PSF) in Q3 2022, a 10.9% increase over the prior year. Since Q3 2022, pricing has moderated only slightly, down 1.1% as of Q1 2023. MOBs continue to make up the largest section of healthcare real estate transactions and 2022 saw a total transaction volume of $24.7B.

Source: JLL Research, Revista Pro

Rising interest rates and slowing economic indices in 2023 have affected capital markets across all commercial real estate asset types, and although MOBs have not been immune to this trend, their cap rates remain least affected. According to a recent report by Cushman & Wakefield, MOB cap rates were at a low of 5.6% in Q1 2022. As of Q1 2023, cap rates had increased by 30bps to 5.9%, however, other asset classes also saw notable upticks with MOB being the least affected.

Source: Cushman & Wakefield Research, Revista Med, MSCI RCA Analytics (hedonic cap rates utilized for office, apartment, retail and industrial)

Investor interest in the MOB capital markets remains strong due to the resiliency of its occupancy. JLL reports that the national MOB occupancy rate did not dip significantly during the COVID pandemic and is 11.4% higher than traditional office space. The in-person nature of most medical services is a large driver of the higher occupancy rate. While telehealth peaked at 52% during the pandemic, it now only accounts for 10% of all medical visits. Due to the higher cost to build out a medical office space, the tenant tends to remain in the space longer, providing additional stability from an occupancy and NOI perspective.

Source: Revista; Top 100 Markets

Medical office asking rent has also been increasing 2.29% on average since 2021, whereas overall office market rents have only been growing by 1.9% on average. An investor survey conducted by JLL found that rental rate growth for MOBs is projected to be between 2-4%. A strong rental rate during economic uncertainty can temper the rise of cap rates, further making this asset type desirable in today’s market.

Source: Revista; Top 100 Markets

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.