"There will be a significant increase in both short- andlong-term demand for medical offices and outpatient facilities,"declares a new report from BremnerDuke Healthcare Real Estate, thehealthcare facilities development arm of publicly held Duke RealtyCorp. Deeni Taylor, executive vice president of BremnerDuke, notesthat during the past two years, BremnerDuke medical officeproperties have performed favorably, with occupancy remaining near90%. Taylor notes that, during the past year, Duke Realty hasraised more than $1.5 billion in capital, "which will enable us toefficiently take advantage of these opportunities," Taylorsays.

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A report by Marcus & Millichap points out that, even withthe turmoil in the economy, only 1% of MOBs are now distressed,equating to just $200 million in troubled loans, compared withalmost $20 billion for the 3% of traditional office assets now atrisk. Nonetheless, Marcus & Millichap points out, the MOBsegment remains under pressure. "Recessionary stresses and risingmedical costs have kept aportion of the US population on thesidelines for elective outpatient care, easing demand forphysicians' services and,in turn, medical space," the reportstates. As a result, deliveries of new medical space have recentlyoutpaced absorption and vacancy has ticked up, forcing operators tolower rents in an effort to keep occupancy levels in check,according to the Marcus & Millichap report.

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The national debate about healthcare reform "is especiallyrelevant to the MOB market, as any measures passed by Congresscould further bolster the sector," Marcus & Millichap pointsout. It cites estimates that if 50% of the 46 million people whoare now uninsured gained coverage, the added demand would requirenearly 45 million square feet of MOB space beyond what is needed tosatisfy normal demand trends. BremnerDuke notes that someprojections call for adding as much as to 61.9 million square feetof additional MOB space, based on the current ratio of 1.9 squarefeet per insured person.

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BremnerDuke approach in today's market is concentrating on"cultivating relationships in markets where demographics point tostrong projected growth," the company says. In the 20 markets whereDuke Realty has a strong presence, the firm is leveraging itshealthcare expertise and experience to develop relationships withlocal hospitals. BremnerDuke has also focused on developing strongrelationships with regional and national healthcare systems acrossthe country.

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Another point in the Marcus & Millichap report is that,although lenders are favoring MOB assets, transaction velocity hasbeen stymied by the capital markets crisis and subsequent lack ofavailable credit. "Increased equity requirements have put a damperon purchases," as the loan-to-value ratios allowed by lendershavedropped from 90%, including mezzanine debt, to 60%. Althoughdeal flow has slowed, MOB sales as a share of total office activityhave risen from 14% to 25% over the past seven years, the reportshows. "This clearly demonstrates the continued draw of MOBproduct, which provides higher risk-adjusted returns and morestability than traditional office assets," it says.

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