On-Campus MOBs Command Premium Amid Flat Cap Rates
Ambulatory surgical centers are also sought after assets by investors.
Respondents believe healthcare capitalization rates will remain relatively flat at +/- 10 basis points (bps) across all healthcare property types in 2024 with on-campus medical offices continuing to command a premium over off-campus medical offices, according to a new report from Partner Evaluation Advisors.
Ambulatory surgical centers (ASC) is another leading industry segment, according to the report, which said that most investors are underwriting only a slight increase (<50 bps) between a going-in capitalization rate and an exit/reversion capitalization rate.
According to a November 2023 survey of leaders in the healthcare industry, the majority of respondents (42%) anticipated that capitalization rates would remain relatively flat over the next 12 months; 28% expected an increase of more than 25 bps; 26% of respondents expected rates to increase between 10-25 bps; and just 4% of respondents anticipated rates to decrease.
While medical office buildings and ambulatory surgery centers in primary locations are expected to trade at the lowest capitalization rates, inpatient rehabilitation facilities, behavioral centers, and substance use treatment centers would trade at higher rates.
“Similar to what we saw in the primary market responses, rates for secondary market medical office buildings and ambulatory surgical centers are expected to trade at lower rates compared to other healthcare asset types,” according to the report.
The majority of respondents said they are expecting healthcare assets to be on the market for 3 to 5 months from the day of listing to the day of closing, which is consistent with 2022 and 2023 marketing times.
The increased cost of capital and increased cap rates are what the consensus of respondents indicated as reasons for property values to decline with most respondents saying values have fallen by 10% to 20% over the past 12 months.
Partner Evaluation Advisors said the healthcare industry continues to perform despite the challenging capital markets.
“Occupancy remains extremely high compared to other property sectors, and the aging US population continues to create high demand for healthcare services,” it said.
The lack of new supply and favorable demographic trends offer an attractive investment environment for healthcare investors, which would offset the expectation that interest rates will remain elevated in 2024.