Investor demand for medical office buildings (MOBs) is stronger than leasing market indicators suggest – a truism for most commercial property types – due to investors’ search for yield in a low interest rate environment. MOB sales hit an all-time high of $7.1 billion in 2013, up 6% from 2012. Despite rising long-term interest rates in the second half of the year, MOB cap rates held stable at 7.2% in the second, third and fourth quarters of 2013, according to Real Capital Analytics – a sign of sustained investor demand.
In contrast to investment activity, occupier demand for medical office space is feeling the effects of the changing regulatory environment in the health care industry, the rocky implementation of the Affordable Care Act, and the need for health care providers to cut costs in the face of shrinking profit margins. As a consequence, the recovery of the MOB leasing market has trailed even the slow pace set by standard office space.
Consider the following:
- After peaking at 12.1% in Q4-2009, the vacancy rate for the overall MOB market – both owner-occupied and leased space – has retreated slowly, ending 2013 at 11.0%. The vacancy rate for space added in 2010 or later is slightly higher at 14.4%, suggesting that some newly delivered buildings remain in their lease-up phase.
- Net absorption totaled 6.1 million SF in 2013, on par with the five-year average of 5.9 million SF but less than half the 2003-2008 average of 13.5 million SF. Buildings completed in the current decade (2010 and later) absorbed about two-thirds of the total, while buildings added in the 2000s absorbed about one-third of the total. Properties added in earlier decades absorbed little new demand as a group.
- Space under construction ended 2013 at 6.1 million SF, on par with where it has been for the past three years. This is in contrast with other property types where construction activity is ramping up.
- After a drop of 7.4% from year-end 2008 to year-end 2012, the average asking rental rate for MOB space reversed course in 2013, rising by a modest 1.3%. Contrary to what might be expected, older buildings, which have lower rental rates, held their rates better than newer, more expensive buildings – a sign of the propensity for health care providers to stay put as well as the uncertainty surrounding the Affordable Care Act.
Despite the sluggish leasing market recovery, the long-term outlook for the sector remains strong for several reasons:
- The aging of the baby boom generation. People over 65 years of age make three times as many physician office visits per year as people under 45.
- The expansion of treatment protocols developed by the expanding biotech industry. Diseases that used to be fatal are now often considered chronic and can be managed with proper treatment.
- The provision of health insurance to millions of Americans through the Affordable Care Act, resulting in higher levels of demand for health care services (although the final number remains in doubt due to the problem-plagued rollout of the insurance exchanges)
- The trend toward shifting care from hospitals to less expensive outpatient facilities including MOBs.
Robert Bach Director of Research – Americas
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