CALABASAS, CA—Although the medical office building sector saw an across-the-board sales velocity increase of 15% year over year for the first nine months of 2014, all MOB product is not created equal. The bifurcation in this asset class—favoring newer product—is likely to intensify as current healthcare trends accelerate, according to a new Marcus & Millichap report prepared under the aegis of Alan Pontius, SVP and national director of the firm’s Healthcare Real Estate Group.
Even as implementation of the Affordable Care Act and the aging of the US populace inevitably will grow demand for medical services, “quantifying the impact on future medical office space needs has become increasingly difficult,” MMI’s report states. Multiple trends are clouding the crystal ball, and they include “a growing physician shortage, the proliferation of in-store clinics, telemedicine, evolution of the care delivery model and overall healthcare-industry consolidation.”
If the long-term effects of these variables are difficult to ascertain, the near-term impact on property-level performance and values is clearer. MMI’s report notes, for example, that the shift toward a more consumer-centric delivery model “has encouraged hospitals and health systems to bring more care into communities, mostly by way of outpatient facilities and satellite offices. These large providers tend to favor newer medical office properties.” Typically, the newer product offers flexible designs and incorporates features intended to promote efficiency and maximize space utility.
Newer MOBs also play into another factor in major providers’ real estate devisions: aesthetics and visibility. That’s because “outpatient expansion brings with it tremendous opportunities for marketing and branding,” the report states.
From a marketing perspective, healthcare tenants now favor properties “that improve the overall patient experience, be it through aesthetics, convenient parking or on-site diagnostic services,” MMI says. “Catering to consumer preferences will only become more critical in years to come as providers compete for a share of the newly insured population.”
To this end, the report states, “the lion’s share of new space demand is now being funneled into modern buildings, driving down vacancy rates and supporting above-average rents for later-vintage assets.” Development is up by about one-third over the year prior, with MMI projecting that eight million square feet of new product will come on line by year’s end.
While newer product theoretically would command higher rents, “the growing involvement of hospitals and health systems in lease negotiations likely will inhibit future rent growth, as major providers often have both scale and credit working in their favor,” MMI’s report states. On the other hand, landing a sizable tenant not only has the potential to reduce management costs but may also elevate property values. “During the past year, medical office buildings with major hospital tenants traded for an average of nearly $270 per square foot, a roughly 40% premium on the MOB market overall.”
Conversely, early-vintage medical office properties, at least those which contain multiple independent practices, “appear likely to bear the brunt of tenant attrition due to industry consolidation and physician retirement,” according to MMI’s report. “While many older multi-tenant buildings currently boast below-average vacancy, the tide may turn in the not-so-distant future.”
Nationally, it’s estimated that 45% of office-based physicians are over 55 years old, MMI says, and many doctors who postponed retirement during the recession have begun to reconsider amid recent stock market gains and the prospect of penalties for non-compliance with meaningful use standards. “An approaching wave of retirements, coupled with the growing dominance of health systems in leasing decisions, elevates rollover and re-tenanting risk for many older buildings, which likely will drive further divergence in prices and cap rate trends by property vintage.”