Forecast Favors Medical Office Buildings

Medical office properties, since they exhibit "considerable esistance to the economic downturn," are continuing to attract investor interest, the report points out. But it notes that, "There are locales across the country where medical office assets are underperforming, and in many instances, there is upward pressure on vacancy." Overall, however, the medical office building segment is holding up better than other product types.

Marcus & Millichap forecasts that, nationally, completions of new medical office buildings are forecast to drop to 14.1 million square feet this year, or an inventory expansion of 2.6%. This will be down from a peak of 17 million square feet in 2008.

The general trend for rents and vacancies suggests that a decrease in demand will push vacancy up by 1% this year to 12.4% and that rents will dip by roughly 2.7% this year after finishing 2008 at 1% higher, or $24.60 per square foot per year. The report explains that the vacancy and rent changes reflect uncertainties in the economy, including layoffs and corporate benefit cuts, that have prompted many consumers to forgo routine health care and some elective procedures.

In the Northeast, developers are expected to complete of 1.3 million square feet of medical office space in 2009, down 25% from 2008. Vacancy is expected to rise and rents are forecast to decline after climbing 40 basis points in 2008.

The construction trend will differ in the Southeast, where developersare forecast to deliver four million square feet of space this year after completing 2.3 million square feet in 2008. Nearly 40% of the Southeast projects are located in Florida. After rising 1.5% last year to 11.6% because of the large amount of development, vacancy is forecast to rise approximately 1% again in 2009 as new product comes online. "The long-termoutlook for the region's popular retiree locales remains favorable, however,as healthy population gains in older age cohorts will support increaseddemand for space," the report points out. Nonetheless, asking rents are expected to fall until vacancy moderates, with the largest corrections projected in central Florida.

In the Midwest, completions in the region continue to averageapproximately 3% of inventory, with roughly 4.4 million square feet ofspace forecast for delivery this year. Vacancy rose 20 basis points last year to 11% and is expected to register a rise in 2009. As a result, owners in the Midwest are forecast to cut rents this year to keep vacancy in check.

In the Southwest and Mountain regions, medical office construction is beginning to slow in the Southwest as "increasing vacancy and the sour economy dampen builder sentiment," Marcus & Millichap notes. This year, developers are forecast to deliver three million square feet of space, adding 2.3% to inventory, with vacancy expected to rise after increasing 1.8% to 13.2% last year. As a result, rents are expected to fall.

In the West and Pacific Northwest, the report states, "Developers are pullingback on deliveries, particularly in Riverside-San Bernardino and Las Vegas."Completions in the region will drop by more than 60% this year as the recession and the high development levels of 2008 will push vacancies higher. Nonetheless, vacancy in the region remains the lowest in the nation at9.2%, and rents are expected to rise this year. Las Vegas will be hardest-hit, with vacancy forecast to climb again in 2009 after jumping more than 400 basis points over the past 12 months to approximately 21%, according to the report.