Medical office CRE shows strong signs of improvement

Colliers’ recent U.S. Research Report for the third quarter of 2022 covering healthcare real estate offered a number of reasons for optimism, GlobeSt.com reports. The report, which covers performance in the top 100 U.S. markets, revealed that the medical office property sector’s (MOB) vacancy rate decreased by 40 basis points during the first half of 2022 by 8 percent. It’s a favorable comparison to the broader office sector where vacancy increased 30 basis points during the same time period to 15.1 percent.

“Despite economic concerns and industry challenges, the medical office property sector (MOB) continues to go from strength to strength, setting record highs for asking rents, sales volume, and pricing over the past four quarters,” the report said. “Demand is outpacing supply, vacancy remains tight, and capitalization (cap) rates have remained relatively stable. As a result, development activity is gaining momentum, reflecting confidence in the sector.”

Other positive signs for the medical office healthcare real estate sector included increased absorption; net absorption totaled 22.1 million square feet over the 12 months to mid-year 2022, which is up from 12.5 million square feet during the 12 months before. Meanwhile, asking rent for MOB space went up 1.7 percent during the first half of this year to $23.06 per square foot—a new high for the sector.

Construction figures saw a slight uptick from the previous 12 months (14 million square feet vs. 13.7 million square feet), but total investment in MOBs hit $17.2 billion over the four quarters to the second quarter of 2022—a significant increase from $9.6 billion during the preceding 12 months. Additionally, average pricing went up to $397 per square foot during that same timeframe.

“This performance is particularly impressive given the continued cost containment pressures faced by the healthcare industry,” the report said.

Major metro areas enjoy falling vacancies, increased rents

Four of the 10 top U.S. MOB markets ended the second quarter of 2020 with below average vacancy rates, according to the Colliers report. Meanwhile, five of those 10 top markets achieved above-average rent growth. Los Angeles saw the strongest rent growth in the 12 months leading up to Q2 2022 at 3.2 percent. Miami (3.1 percent) and Boston (2.7 percent) were second and third, respectively. Boston also had the lowest MOB vacancy rate among major markets at 6.3 percent, followed by New York (7 percent). Dallas (10.6 percent) and Houston (12.3 percent) were among the top markets with the highest vacancy levels.

Los Angeles led to the top 10 markets by a fair distance when it came to MOB asking rents, at $36.85 per square foot. No other top 10 market had an asking rent rate of more than $30 per square foot.

State of healthcare industry could dampen medical office CRE’s good news

Things may be looking up for the state of medical office CRE, but the same can’t be said for the healthcare industry the sector relies on.

“While other challenges will persist, such as the residual effect of the pandemic, supply-chain challenges and staffing shortages, many healthcare providers continue to prioritize cost containment,” the report said.

The report pointed to two instances where the healthcare industry took cost-cutting measures. Centene canceled plans to occupy a new 800,000 square foot headquarters in Charlotte, N.C., citing increased remote work as to why it no longer needed large amounts of physical office space. The second was Molina Healthcare’s announcement that it would cut two-thirds of its leased real estate footprint as its staff moves to permanent remote work.

“Reductions in space leased primarily focus on cutting administrative functions, while there is a desire to increase clinical delivery space,” the report said. “In the face of reduced income and, in some cases, operating losses, some providers are cutting staff despite an overall shortage of employees in the healthcare industry.”

Overall, medical office CRE’s outlook is strong

Despite the healthcare industry’s struggles, Colliers acknowledges a promising outlook for the medical office CRE sector.

“While no property sector will be immune to the impact of high inflation, a slowing economy and rising operating costs, the MOB sector is well placed to weather the storm,” the report said. “Underlying business fundamentals for medical tenants are stronger than a typical office user, which reduces concern over future income streams.”

The report also noted that there’s a greater stability in demand for medical services as well as potential pent-up demand for procedures that were canceled or postponed during the COVID-19 pandemic. Additionally, one in five Americans will be 65 or older by 2030, per the U.S. Census data. That number will increase to one in four by 2060, lifting the demand for medical offices.

“These fundamentals, coupled with a limited pool of available medical office assets, should continue to drive healthy sales volume,” Colliers said. “However, pricing expectations between buyer and seller may widen, particularly for leveraged acquisitions.”

Download the full report here.