Commercial Real Estate Investing From A-Z 5 Reasons to Invest in the Medical Office Space
What's happening in the medical office space and why is it a good asset class to invest in? We are getting insights from Catherine House, National Healthcare Chair for the firm SVN. She is responsible for coordinating healthcare related commercial real estate activities in medical and dental office buildings.
You can read this entire interview here: https://bit.ly/3c47Vau
Why is the medical office space popular right now?
1. For those people who are looking for safety, and I think there's an element of a flight to safety for people who are interested in this sector, if you're looking for distressed asset opportunities, this is probably not going to be the right sector for you to be focusing on. There's a number of reasons for that. And if you actually look at the Medical Office fundamentals, there's some really interesting trends. If you look at rent growth, for example, I'm specifically looking at hospital affiliated medical office, the average rent continued to gradually increase throughout 2020. And they're predicted to continue increasing in 2021. So the national medical office rent is currently approximately $26 per square foot. And we've positive rent growth, currently at less than 2% nationally.
2. The other fundamentals to look at is occupancy. Occupancy for on campus is currently 93.3%, and 92.6% for hospital affiliated off campus medical office buildings. Occupancy trends have been very steady. And they're actually forecast to remain steady throughout 2021. If you compare that with our predictions that we were just talking about for regular office, we're talking about very stable metrics with vacancy below 10%, and predicted to remain below 10%.
3. The other thing that we're seeing is absorption rates are outpacing completions. If you look at cap rates, another great fundamentals to take a look at, we actually saw them decline in 2020. And declining cap rates, and steady rents actually mean an increase in the underlying value of the assets. So, based on RCA's data, the quarterly average MOB cap rate actually remains between 6.3 and 7%, since the beginning of 2015. So it's steady, it's safe. For investors interested in a safe steady investment, this particular sector was getting a lot of interest.
What is driving all of that demand?
1. One of the key reasons is that medical office is an essential sector that really remained open for business throughout the pandemic.
2, It's also an area where it is extremely difficult to do it remotely. For the most part, if you need to see your physician, you need to physically go into the office. Whilst there has been an uptick in trends, such as telemedicine, which is a very fascinating area to get into that I'm not sure we have time for today, in general, there is still that demand for in person visits.
3. And many physicians did have their income impacted in 2020, one of the reasons for that is a lot of the elective surgeries and procedures that are actually the most lucrative, many people actually put those off. So the revenue for the year and 2020 was down.
4. But in the long run, that businesses survived and actually are predicting to be extremely busy in 2021 and beyond.
5. And that's not even getting into some of the demographic trends that we're seeing with the aging baby boomers. There's a correlation as one gets older for an increased need for medical services. So we're actually expecting the demand for medical office to continue to grow significantly over the next 10 years plus.
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