Medical Office CRE Market Builds Momentum

However, tenants and landlords are juggling tightened finances.

Any medical facility appreciates positive improvements in the space’s condition. The fundamentals of medical office buildings are improving, which benefits operators, investors, and property owners alike.

The top 100 U.S. markets are covered in a Q3 2022 study on healthcare real estate by Colliers. The report’s executive summary stated that “Despite economic worries and industry obstacles, the medical office property sector (MOB) continues to grow, hitting record highs for asking rents, sales volume, and pricing over the past four quarters.” Demand is surpassing supply, there is little room for error, and capitalization (cap) rates are largely consistent. As a result, development activity is accelerating and demonstrating sector confidence.

But there is a catch: things aren’t looking so good for the healthcare sector, on which they rely. Price pressures remain present, and MOB owners may need to be monitored and given possible treatment options.

On the bright side, the top 100 metro areas had an average vacancy rate of 8% in the first half of 2022. This constitutes a 40 basis-point decrease from the same time last year.

The highest net MOB asking rentals in the top 100 were in Los Angeles, where they were $36.85 per square foot. This price is certainly an anomaly.

The research noted that none of the other top 10 metros had an average MOB rent of over $30 per square foot. The lowest costs in the top 10 didn’t include numbers, but a graph clearly demonstrated that four—Atlanta, Boston, Dallas, and Philadelphia—were much below the national average. “Boston and New York are the next highest, at $26.26 per square foot and $26.19 per square foot, respectively.”

Construction increased in an effort to keep up with demand; 14 million square feet were completed in the four quarters that ended in Q2 2022. This was an increase above the 13.7 million square feet from the previous year. More dramatically, from 30.9 million to 37.1 million square feet, MOB under development increased.

Additionally, investor demand was high—it reached a record-high $17.2 billion in the four quarters that ended in Q2 2022.

Since many individuals find it difficult to refuse medical care, MOB is substantially positioned to survive economic storms. The prices are also a concern for practitioners. That would suggest real estate overhead will also be under review. “In the face of lower income and, in some cases, operating losses, some providers are eliminating staff despite an overall shortage of employees in the healthcare industry.”

Lowering such prices is expected to be on their agendas as larger organizations—hospitals, HMOs, and other big operators—take up a greater percentage of MOB, and they have the financial clout to negotiate hard.
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