4 reasons investors are placing their bets on medical office buildings

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June 20, 2018

medical office buildings

Rising patient numbers and real estate spending point to long-term demand and cycle resilience for investment in healthcare-related buildings. As a result, the buyer landscape for healthcare real estate, specifically medical office buildings (MOBs), is robust and growing.

Hospitals and health systems have historically held the lion’s share of the MOB market. But hospital operators are finding that opening up their real estate to investors frees up capital for patient care and quality improvements. Today, they own only about half of medical office buildings (MOBs), with REITs, private investors, individual providers, government and other entities accounting for the other half.

Here are four reasons investors are placing their bets on MOBs.

1. The fundamentals speak for themselves. 

MOBs boast uniquely stable long-term occupancy rates. The quarterly weighted average occupancy ranged between a low of 90.4 percent in Q1 2009 and a peak of 92.6 percent in Q4 2016 – a mere 200-basis-point spread from recent peak to trough. MOBs have also put up exceptional pricing performance. Pricing has steadily trended upward over the last decade despite the Great Recession, with price-per-square-foot currently at peak levels.

2. Higher rates of return

As competition for core product in gateway markets has resulted in several years of cap rate compression, investors are moving into new sectors. Medical office has consistently offered a 2 percent (or greater) spread in cap rate over similar benchmarks for the last five years, making it a desirable prospect.

3. High-quality tenant bases

From the perspective of MOB investors, hospital affiliation may provide greater tenant stability and credit ratings as the hospitals themselves become the lessees. Moreover, medical office space users typically relocate to new buildings less often than general office tenants. The longevity of tenants stems from a higher cost of build-out for the typical medical user over that of a general office tenant.

4. New construction is keeping pace with demand

While 2018 expects to see higher completions and starts than 2017, virtually none of the current development pipeline is speculative. Deliveries are in step with absorption, and overall, steady occupancies and increasing rental rates are on the short- and long-term outlook.

Looking forward, healthcare real estate will continue to grow into a core asset type as consistency over the last five years fuels greater confidence in the sector.

For more on MOB investment and other healthcare real estate trends download our 2018 U.S. Healthcare Outlook.